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ALZA SUSTAINS AND INCREASES MARKET MOMENTUM: STOCK DOUBLES IN FIRST SIX MONTHS OF 1987; "F-D-C" COMPOSITE CLIMBS 31.4%, GROWING AHEAD OF DOW AVERAGE

Executive Summary

Alza's drug delivery technology delivered a large first-half runup in stock value among 20 issues in the Pharmaceutical Component of the "F-D-C" Index. Alza stock advanced over 100% to close June 30 at 37-3/8, adding to a 21% gain in its stock price during 1986. "Street" interest in Alza has been fueled by a combination of the company's product development program, strong balance sheet and experience among firms involved in controlled-release drug delivery. Alza's background in drug delivery has coincided with the increased importance of new formulations and delivery technologies to provide product differentiation. One wave of new product interest crested in January, when Alza announced that NDAs had been filed for sustained release formulations of Pfizer's Procardia, Glaxo's albuterol and an OTC cough/cold combination product. Until recently, Procardia has been the top calcium channel blocker in-U.S. sales. At the time of the January announcement, the company said that six additional filings were scheduled before the end of 1987. The anticipated flow of new products would dramatically increase Alza's royalty potential and lessen the company's dependence on revenues from one or two products. With almost twenty years of experience in the drug delivery business, Alza maintains the prestige of an originator in the field. With a focus on a wide range of delivery systems, Alza has developed oral, transdermal, intravenous, injectable, implantable, rectal, topical and most recently, site-specific therapeutic systems. Alza continues to expand its technology base -- new projects include multiple drug delivery, electrically assisted transport, biodegradable systems and pulse/pattern/delay systems. An example of the Street view pushing Alza's stock ahead is a recent opinion from Goldman Sachs drug analyst David Musket, who predicts that "over the next several years Alza will prove to be one of the fastest-growing companies in the drug industry, with compounded earnings growth expected to exceed 50% per year." Musket cites the company's high profile, given the number of NDAs it will have on file, and its low-risk approach to product development. Alza has ridden the market crest at a time of management transition. Alejandro Zaffaroni, the founder and financier/deal-maker who kept Alza going through the start-up period, stepped down as chief exec on July 1. He was succeeded by Martin Gerstel, who was previously president. The firm's new president is Jane Shaw, a long-time research exec. Overall, 18 of 20 Pharmaceutical Component issues advanced during the first half of 1987, with 12 climbing in excess of 30%. In addition to Alza, acquisition target Robins (up 20 to 27-7/8), advanced more than 100%. As a group, Pharmaceutical stocks were up roughly 37% for the six months. Glaxo (up 11-1/4 to 26-5/8) has moved significantly during 1987. A frequent entry on the NASDAQ most active list in 1986, Glaxo's stock price flucuated very little until 1987. Glaxo American Depository Receipts began trading on the New York Exchange in June. In terms of U.S. retail sales (at acquisition cost), Glaxo's $500 mil. in 1986 moved the company from thirteenth place to seventh among the top drug firms, according to the market research firm Pharmaceutical Data Services (PDS). The company's ulcer drug Zantac, with retail sales of $400 mil. became the number two product in the U.S. One of two retreating issues on the Pharmaceutical Component for the six-month period, Marion slipped from its big gains of 1984-1986. The stock declined 1-3/4 points for the first six months. PDS reports that the company's cardiovascular product Cardizem has overtaken Pfizer's Procardia as the top-selling calcium channel blocker on the U.S. retail market. Ironically, Pfizer stock surged 18% during the six months, rising 11 points to close at 72. Earnings growth fueled by its ACE inhibitor, Capoten and by Azactam, the limited spectrum hospital antibiotic launched in January, helped boost Squibb's price over 50% in the first half (up 29-3/4 to 86-3/4). At the end of June, the company announced its first biotechnology venture, a $115 mil. investment in Cetus that gives Squibb a 5% equity position in the biotech firm and the right to market certain products. ACE inhibitors, injectable antibiotics and biotech investments are good street lures in 1987. Merck (up 46-5/8 to 170-1/2) is enjoying the notoriety of its new products, including brisk sales by its Vasotec, the second ACE inhibitor on the U.S. market, the broad spectrum hospital antibiotic Primaxin, and Pepcid, an H[2]-antagonist. During the past six months, Merck also entered agreements with Biogen and Repligen covering mullerian inhibiting substance and AIDS vaccine technology, respectively. Generic drug stocks also continue to show strength in 1987. Par (up 10-1/2 to 25-3/4), the big winner, advanced nearly 70%. In 1986, the company moved into the growth area of generic injectable products with the purchase of Quad, which the company predicts will show a profit this fiscal year. Market valuations of Mylan (up 3-3/4 to 14-7/8) and Zenith (up 2 to 10-1/2) increased by more than 20%, with Bolar (up 2-1/8 to 23-3/4) up almost 10%. Reflecting the overall strength of the market in general and investor optimism in drug-related stocks specifically, the Index Composite advanced 31.4% in the first half of 1987, crossing the 1,000 mark to close at 1187.2. By comparison the Dow Jones average, which closed at 2418.53 on June 30, was up almost 28% for the period. Chain stocks, led by American Stores (up 18-7/8 to 54-3/8), Rite Aid (up 9-1/2 to 39) and Walgreens (up 8-7/8 to 41-1/4), nearly doubled their aggregate first-quarter percentage increase, from 17.3% to 31.4%. The Diversified Component was led by companies whose primary business is chemical manufacturing: Dow (up 27-5/8), DuPont (up 36 to 120), Pennwalt (up 13 to 62-3/4) and American Cyanamid (up 10 to 49). Chart omitted.
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