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LILLY'S PROZAC BRIGHTENS STREET ATTITUTE TOWARD STOCK, WHICH JUMPS 20% IN FIRST QUARTER; RECESSION WORRIES, MERGER MANIA GIVE DRUG STOCKS A BOOST

Executive Summary

Lilly stock jumped 20% (up 17-3/8 to 102-7/8) during the first three months of 1988 on the strength of the company's strong 1988 earnings performance, the unexpected fast sales growth from the antidepressant Prozac, and investor optimism for the company's R&D pipeline, particularly Lilly's neutral receptor research. Lilly's quiet stock performance in 1988 (up 9.6% on a 7-1/2 point gain to 85-1/2) compared to other drug stocks hid a "sleeper" despite solid nine-month earnings and four new drug approvals during the year, including Prozac and the H2 antagonist Axid. In addition to the bouyancy provided by Prozac and finances, the first quarter run-up was preparatory to a two-for-one stock split set for May 1. In its first full year on the market, sales of the serotonin re-uptake inhibitor Prozac topped $ 100 mil. Last year, according to PDS, Prozac had 6% of the 38.3 mil. total Rxs for antidepressants and 16% of the dollar share. PDS says the drug is now generating pharmacy sales of $ 14 mil. a month in the U.S. A March 13 Goldman Sachs research brief predicts Prozac worldwide sales could reach $ 270 mil. this year as it completes a gradual worldwide roll-out. Prozac was just one of nine Lilly pharmaceuticals in six therapeutic categories which had volume over the century mark last year. As a result, 1988 earnings skyrocketed 85.4% to $ 761 mil. on a revenues increase of 11.7% to $ 4.1 bil. Lilly's 20%-plus first-quarter increase was joined by double-digit gains from six of the 21 pharmaceutical stocks followed in the "F-D-C" Index of AMEX and NYSE issues as the Street began turning its attention to the relatively recession-proof drug industry as security against fears of an economic downturn later this year or early next year. Abbott, Glaxo, Marion, Merck, Schering-Plough and SmithKline Beckman had increases ranging from 11.5% to 26.5% (see chart, p. 22). Among major pharmaceutical stocks, only Upjohn was a decliner (off 2.2% at 28-1/8) due to investor disappointment with the Rogaine roll-out in the U.S. in the wake of overly optimistic analyst predictions for the drug. The Pharmaceutical (up 12.7%), Diversified (up 6.9%) and Drug Chain (up 9.4%) components of the "F-D-C" Index each outperformed the two most-watched stock market indicators -- the Dow Jones Industrials, which closed up 5.8% for the quarter, and the S&P 400, which advanced 5.7%. Among the blue-chip pharmaceutical stocks, SmithKline Beckman let all stocks with a 26.5% price run-up in response to lingering merger rumours. The Street talk became self-fulfilling when SmithKline and Beecham announced on April 2 that they were in merger talks. SmithKline stock had jumped 5-1/4 points to 60-7/8 on March 31 after Beecham acknowledged that it had hired merger specialists Wasserstein Perella as financial advisors. Following the joint announcement, SmithKline stock moved another five points on April 3 to 65-7/8. "The continuing entity that would be created . . . would be governed by a board of director drawn equally from both companies and with management selected from both companies," the two firms explained April 2. The Street is expecting a deal to emerge from the talks in the near future, possibly as early as the week of April 10. SmithKline's annual meeting is set for April 26, which provides some incentive to cement the deal in time for a share holder vote. Current Street estimates on the value of the deal put it near $ 75 a share for SmithKline, or about $ 9.3 bil. However, Beecham and SmithKline may choose to structure the deal to allow a lower price for SmithKline's drug business -- the target of Beecham's attention -- by spinning off the non-drug businesses and rewarding shareholders with a dividend reflecting the value of the divestitures. The "blood-in-the-water" atmosphere surrounding a merger on the scale of a SmithKline-Beecham marriage has generated Street rumors of an army of other suitors waiting to begin a bidding war. During the week of April 3, DuPont, Nestle, and ICI joined Takeda and Hoffman-LaRoche as rumored suitors. Partly as a result of the rumors and partly due to speculation over the Beecham negotiations, SmithKline stock climbed to a high of 68-1/2 on Friday, April 7 before sliding to a closing price of 66-3/4. Warner-Lambert, Schering-Plough, Pfizer, Syntex and Rorer's stock prices have also benefited from the merger mania. During the first week of the new quarter, Syntex added 2-1/2 to 44-3/4, Schering-Plough advanced 1-3/4 to 65, and Rorer climbed 1-7/8 to 42-1/2. For the quarter, Pfizer slid .9%, due in part to the withdrawal of its "unbundled" stock offer for up to 20% of its outstanding common shares. Marion and Forest turned in significant gains based on their own solid drug performances. Marion climbed 24.8% to 25-1/8; Forest rose 25.3% to close at 31. Marion's first quarter was marked by two positive events. On Jan. 23 FDA approved its sustained release calcium channel blocker Cardizem SR, which is expected to account for 20%-30% of total Cardizem sales. The company also announced the upcoming start-up of expanded detailing for its anti-ulcer drug Carafate by Schering's OTC sales force. Forest's good news came on Jan. 26 in the form of FDA's expansion of "AB" bioequivalence ratings to all doses of Theocron. The reference product is Schering's Theo-Dur. Chart omitted.
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