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PCS, IMS PACE DIVERSIFIEDS AS COMPOSITE ADVANCES IN RETREATING MARKET

Executive Summary

Gains by PCS (up 2-7/8 to 34-5/8), IMS (up 2 to 35-1/8), Pharmacia (up 1-7/8 to 28-7/8) and Beecham (up 1-3/8 to 18-3/4) helped the Diversified Component of the "F-D-C" Monthly Index of O-T-C stocks post a gain in a correcting September market. Prescription drug claim processor PCS has grown rapidly since spinning off from McKesson less than a year ago. The company began trading at $15 a share and is now well over double that starting point. Morgan Stanley analyst Paul Brooke cites low penetration in the large potential market for card-based reimbursement as an indicator of good growth opportunity for PCS. Brooke also sees barriers to entry for new players in the card field. He predicts earnings per share growth of 37% for PCS over the next five years. Strong operating results continue to drive the stock price of pharmaceutical market research firm IMS. During the second quarter, the firm's net income rose 30% to almost $10 mil. on sales of $109 mil., a 24% increase over the same 1986 period. Operating income approached $16 mil., up 27% for the three months. An advancing Diversified Component combined with a flat Pharmaceuticals group to offset declines by the Wholesaler and Chain Component averages in September. The Composite average climbed toward the 500 mark with a modest 2.1% gain in September. For non-drug stocks, however, September was an off month, as both the the Dow Jones and S&P 400 averages retreated about 2.5%, to 2596.28 and 375.85, respectively. The pharmaceutical O-T-C issues were led by Viratek (1p 3 to 31-1/2) and controlled-release firm K-V (up 3 to 21-1/4). Highly volatile Viratek gained ground in a retreating market after doubling in August. Viratek's parent company ICN drew wide publicity with a $200 mil. investment in Hoffmann-LaRoche, giving it 6.3% of the voting stock in the tightly-held Swiss concern. The company has continued to wrangle with FDA about a Treatment IND for ribavirin. K-V stock crossed the $20 a share mark, boosting the company's market valuation to over $100 mil. At the end of the month, the controlled-release dosage company announced that it had sold Japanese rights to a cough/cold line to a major Japanese firm. Of the 21 biotech issues listed on the Index, only six managed to move ahead, none gaining a point or more. Biogen (up 7/8 to 9-7/8) showed the greatest percentage increase and Genentech (up 1/4 to 48-1/4), made a strong move toward the end of the month to stabilize at the $48 a share level. There are indications that FDA is progressing with its re-review of the TPA license application. Among the biotech casualties were Genetics Institute (off 6-1/4 to 33), Xoma (off 2-3/4 to 18-3/4) and Cetus (off 2 to 24). Wholesalers were the hardest hit among Index groups, with Bindley Western (up 1-1/4 to 11-1/8) the only issue to advance. Minneapolis-based distributor Krelitz Industries (KRLZ) was added to the Wholesaler Component in September. The company generated over $180 mil. in sales in fiscal 1987, primarily through its Twin City Wholesale Drug operation, which accounts for 80% of total volume. In addition, Krelitz distributes medical and surgical supplies through its James Phillips Company unit. Chart omitted.
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