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UPJOHN's FATE MAY REST ON THE PATE -- "STREET" PERCEPTION OF MINOXIDIL's POTENTIAL HELPS STOCK TO NEW HIGH IN FIRST HALF; "F-D-C" COMPOSITE IS OVER 600 FOR FIRST TIME

Executive Summary

Upjohn was the largest point gainer on the "F-D-C" Pharmaceutical Index during the first half of 1985, fueled by news that the company was nearing completion of two key clinical studies for its topical baldness treatment, Regaine (minoxidil), and anticipates filing an NDA in October. For the six months ended June 30, Upjohn's stock climbed 38-1/8 points to close at 108-1/4, establishing an all-time high water mark. For the week ended July 12, Upjohn added 8-3/8 to 120-1/2. In addition to Street excitement over minoxidil, Upjohn moved during the second quarter to improve its cash Mow through the sale of its polymer chemical business. The chemical segment of Upjohn's business had not been profitable since 1981. The divestiture was also viewed as a move to refocus its operations on health care. Further, two of Upjohn's newer products, Halcion and Xanax, continued to perform strongly. Indicative of the upbeat attitude towards Upjohn, an E.F. Hutton analyst commented: "Excluding any contribution from minoxidil, we are estimating at least a 13% earnings per share growth rate over the next several years. Upjohn is now more of a health care company, with new products that we expect to capture market share in the tranquilizer and sedative markets, estimated at $1 bil. and $500 mil., respectively." The "F-D-C" Composite Index of 50 pharmaceutical, diversified and drug chain issues crossed the 600 threshold for the first time since its establishment in 1965, rising nearly 21% during the six months. Marion (up 15-1/8 to 36-3/4) showed the greatest net percentage increase -- 70% -- of any pharmaceutical stock on the Index and was one of thirteen to show double-digit growth during the first half. The company's first quarter net earnings for the period ended March 31 jumped 50% on a 33.4% sales increase, reflecting strong market performances by Cardizem and Carafate. In addition, the firm has been unaffected by the strong dollar abroad, as virtually all of its business is in the U.S. and Canada. Bolar's 68% increase during the first half was second only to Marion. The generic firm's stock (up 16-1/4 to 40-1/4) seemed to cool during the last three months, however, appreciating less than one point since March 31. Robins and Searle were the only Pharmaceuticals to lose ground, declining 2-1/4 and 10-1/4 to 17-5/8 and 54, respectively. After courting potential buyers for almost a year, Searle announced in the spring that the firm was no longer for sale. Robins established a $615 mil. reserve fund in April to cover Dalkon Shield liability claims. As a result of the reserve, Robins reported a fourth quarter 1984 loss of $461.6 mil. Merck turned in a solid performance, climbing steadily throughout the first half. The firm's stock price increased nearly 20% in the first six months, up 18-5/8 to 112-5/8. Merck has been increasing on the underlying strength of its R&D pipeline, led by the angiotensin converting enzyme inhibitor, Vasotec (enalapril), and the antibiotic Primaxin (imipenem/cilastatin). NDAs for both products are pending at FDA. SmithKline Beckman (up 17-3/4 to 69-5/8) advanced 33.3% in the first half despite competitive pressure on Tagamet and Dyazide, The issue is trading more than 9 points above its 1984 high of 60. The issue received a boost in May with the approval of Ridaura, Additionally, Tagamet sales growth, after suffering considerable erosion due to Zantac, appeared to resume. In a report in May, ValueLine noted the pressure on the two key products and on the firm's diagnostic business, but raised its earnings estimate. The investment service commented: "A recent resumption in worldwide unit sales growth of Tagamet . . . together with continued healthy growth in the eye and skin care segment should cause profit gains to widen in the second half. The stock is likely to outperform the average equity over the coming six to 12 months." Leading the Diversifieds was Forest Labs (up 16-1/8 to 32) which more than doubled in price. The issue really took off during the second quarter, rising thirteen points in ninety days. The firm acquired the 71-man O'Neal, Jones & Feldman sales force in December. In addition, Forest acquired Gilbert Labs, mail-order marketer of the prescription headache drug Esgic, in May. In early July the firm received approval for its controlled release buccal nitroglycerin for the prevention and treatment of angina. American Hospital Supply (up 12-1/4 to 41) posted much of its gain in June, due to Baxter's eleventh hour offer to purchase the firm. Baxter valued American Hospital at $50, a substantial premium over the $36 per share offered shareholders in the planned merger with Hospital Corporation of America. American Hospital's stock price jumped 6-1/2 between June 14 and June 30. Bergen-Brunswig advanced after calling off its proposed merger with Natl. Intergroup in April. Bergen is the only whslr./distributor stock carrying ValueLine's highest timeliness rating. Nine of the 10 chain drug stocks on the Index increased during the first six months of 1985 with five showing double-digit increases. Leading the pack was Utah-based American ores (up 26-3/4 to 66-3/4), which announced in Ma that it was creating a 648-store, coast-to-coast drug chain under Osco by consolidating its Skaggs super stores into the former Jewel chains, Osco and Sav-on. Other strong performers among the Chains included Longs (up 8-1/2 to 30-5/8), Perry (up 3-3/4 to 21-3/8) and Walgreen (up 5-1/8 to 27-5/8). Charts omitted.

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