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MYLAN WHINES AND DINES IN '89: WHISTLEBLOWING EARNS MEDIA ATTENTION AND 173% NET GAIN ON WALL STREET; "F-D-C" INDEX BOOMS BACK WITH 37.5% JUMP

Executive Summary

Mylan Labs was a media star and a Wall Street darling in 1989, and it needed only a handful of FDA approvals to get there. While new product flow is generally the life-blood of the generic industry, Mylan soared with only three ANDA approvals and a part share in an anti-Parkinson's NDA. The Pittsburgh generic firm was the beneficiary -- and the cause -- of a shutoff of FDA's ANDA spigot for all companies. The drought in generic approvals in 1989 changed the nature of the business from who could get the first approval to who could stay out of harm's way. Mylan performed that feat to the market's delight and appreciation. The company's decision to air the generic industry's dirty linen and risk the wrath of Capitol Hill vaulted it into the public's eye and gave it the golden image of the good guy in a growing market with a diminishing number of tarnished competitors. For its whistleblowing, Mylan Labs rode a remarkable 173% rise, gaining a net 15-3/8 points to 24-1/4. The gains made it one of the top 10 on the NYSE and a standout as far and away the best performer in a banner year for the 41 stocks listed in the "F-D-C" Weekly Index. After two flat years, the "F-D-C" Index came roaring back in 1989, producing the second best year in the 28 years of tracking by "The Pink Sheet." The 37.5% increase by the composite average fell just short of the highwater mark of 39.4% for the Index set in 1985. The "F-D-C" Index substantially outperformed good gains by the broader market indices: the Dow Industrials, which surged 27%, and the S&P 400, which climbed 25.6%. The past year showed what the combination of four big mergers, the repeal of a government outpatient drug program and scandal in the generic business could do for the larger, established publicly traded firms. A baker's dozen, 13 firms, exceeded 40% gains in 1989 and most of the majors ended the year at the high end of their yearly trading range. Two of the recent industry pacesetters by most measures, Merck and Glaxo, had big 34-35% gains, but they didn't even qualify among the top performers in the sharp upward movement. [EDITORS' NOTE: See box at left for a quick view of the best performers in 1989; see charts on pages 17-18 for a summary of the performances of all 41 index issues.] With those kinds of across-the-board performances, 1989 was not surprisingly a year of big numbers for investors and a year when a number of private fortunes were made or cemented. Among the fortunes realized, the Mylan principals took advantage of their big ride to cash in some of their holdings. In a period from September through November, Mylan's six biggest owners sold a total of 556,032 shares of the roughly 35 mil. outstanding, or about 12% of the stock controlled by officers, directors and other company insiders, according to documents filed with the SEC. Mylan CEO Roy McKnight sold 237,000 shares of the 17% of the company he owned for about $2.6 mil. Five other top insiders, including directors and executive officers, got rid of between 10,000 and 103,598 shares apiece, representing 7% to 39% of their personal holdings, at prices between 16-1/4 and 24-3/4. Other windfall gainers in 1989 included the principals, execs, and accessories to the wide array of mergers: Bristol/Squibb, Marion/Merrell, SmithKline/Beecham, AHP/Robins, Lederle/Praxis and Fujisawa/Lyphomed. * Squibb Chairman Richard Furlaud, for example, turned his holdings in Squibb into over 1 mil. shares of Bristol-Myers Squibb stock. By the end of the year, that switch was already worth an extra $20 mil. to Furlaud -- his roughly $37 mil. in Squibb stock turning into new stock worth more than $56 mil. * One of Furlaud's key lieutenants at Squibb, Charles Sanders, departed for Glaxo a month before the merger. His Squibb shares (not including options) were worth over $10 mil. when he left Squibb. If he still holds them, they have increased to over $18 mil. in holdings in the new company. * Lyphomed's John Kapoor did even better. Eight years ago, the company almost went kaput but instead went to Kapoor and partners for $2.6 mil. in cash and $1.1 mil. in subordinated debt. Kapoor reportedly paid less than $100,000. After weathering several wild ups and downs along the way, Kapoor reached a final agreement this year to sell the business to Fujisawa -- his 4.2 mil. Lyphomed shares now worth more than $132 mil. to the Japanese firm. The deal has not closed yet, but is expected to be complete by April 1. * A vaccine entrepreneur did almost as well. Praxis founder David Smith appears to own more than $100 mil. from the exchange of his 46% Praxis ownership for .2707 shares each of Cyanamid. * And the investment bankers, of course, got their pieces of the pie. J. P. Morgan and Goldman Sachs will each net over $15 mil. for their role in the SmithKline Beckman merger with Beecham, not to mention Wasserstein Perella on the Beecham side. The wealth and stock market appreciation in the drug business at the end of a decade marked by Wall Street extravagance are eye-catching but, in a way, they may not be the best barometers for investment potential in future years. There are other gauges that may be more obscure but more meaningful: * The R&D cost per average successful new chemical entity application now is calculated to exceed $200 mil. * The Amgen effort to hold onto to its sole source position for Epogen is costing fees to at least seven law firms on three legal fronts. * The counterthrusts by Ortho, Chugai/Upjohn and Genetics Institute to get a piece of that market are supporting at least another half dozen law firms. That makes EPO at least a 13-lawfirm produce -- perhaps the clearest sign of the emerging value and maturity of the biotech industry. * Each Cray supercomputer -- one of the new necessities for drug design research -- costs between $18 and $20 mil. * Despite long-gone patents, Dyazide still topped $200 mil. in sales in 1989 and Valium topped $105 mil. [See box pages 22-23 for other non-traditional views of investment statistics from 1989.] But, of the stories of 1989, the generics scandal dominated. And Mylan was one of the early winners of the generic wars. After a slow first quarter start, when the stock backslid 4.2% from a quiet 1988, Mylan picked up steam in the second three months, jumping 20.6% as the firm took center stage in Rep. Dingell's (D-Mich.) hearings on improprieties in the generic approval process. The May hearings before Dingell's House Commerce/Oversight Subcommittee were the first public disclosure of the occurrence of illegal gratuities and favoritism at FDA's generic division. Mylan's mid-May testimony came almost a year after the company first complained to the subcommittee about problems with the generic approval process. On June 9, Mylan and CEO McKnight were portrayed as feisty white knights in a lengthy, front-page story in The Wall Street Journal detailing the company's growing frustration and the decision to blow the whistle. McKnight was quoted as saying: "We either had to take extraordinary steps to remedy the situation or sit back and watch our company slowly wither away and die." Mylan was described as having a "pivotal role" in breaking open the scandal. ABC-TV helped spread Mylan's good guy image to investors nationwide later in the summer via a recounting of its private detective work against suspected FDA reviewers on the "20/20" news magazine. The show included a reenactment of the private eye sifting through FDA reviewer Charles Chang's garbage in the dead of night to obtain documentary evidence. The stock got a further quick boost with the June approval of Somerset Pharmaceuticals' anti-Parkinson's treatment Eldepryl (deprenyl or selegileine). The approval of the drug, with a sales potential of over $100 mil. annually, paved the way for Mylan and partner, Bolar, to acquire Somerset and bring out a brandname entry. In November, a study in the New England Journal of Medicine recommended Eldepryl as a "firstline" Parkinson's treatment. At the same time, however, that Mylan had Congressman Dingell's ear and was basking in the media glow and Eldepryl's approval, the company felt the impact of biting the hand that feeds it. With FDA's generics division virtually shut down, the firm got only three ANDAs approved in 1989; in the year before the scandal broke, eight Mylan generics got the nod even though the firm alleged it was out of favor with some FDA reviewers at that time. One other generic firm, Biocraft, joined Mylan among the top 13 for 1989. Closing the year at 16-3/4, the firm showed a net gain of 7-1/4 points, or over 76%, for the difficult year in the generics segment. One part of Biocraft's success, however, may be attributed to its role as a brand manufacturer for American Cyanamid's (Lederle)new Suprax (cefixime) antibiotic, a product that Lederleis already describing as the likely new leader in the Lederlestable of products and the top product in the treatment of otitis media. Cyanamid was among those firms with a good yearly performance (plus 14.7% to 46-3/4) that paled against the big across-the-board gains. Biocraft also had successes in its generic business: introducing a generic version of Merck's Moduretic with six months of exclusivity; and in a continuing fight with Bristol over a generic version of Duricef (cefadroxil). Biocraft leads the legal wrangling over patents and the import of the raw material for that product 2-1, with a decision due from the International Trade Commission in mid-March. Biocraft recorded its gains despite a less than smooth regulatory experience with FDA in the autumn. In the inspection dragnet of the generic industry undertaken by FDA over the summer and fall, Biocraft got mixed results: a one-page FD-483 notice of adverse observations (an apparent clean bill of health), followed by a regulatory letter about cephalexin manufacturing; the Dingell subcommittee identified Biocraft as a firm with "serious GMP problems." Lilly ironically had a similar type of year. The company was a big winner with Wall Street but has had a disquieting experience with an FDA inspection. Lilly stock shot up 60.2% in 1989, gaining 25-3/4 to close on a post-two-for-one-split year high of 68-1/2. Lilly has an enviable record of NCE approvals -- six in the last three years -- and its pipeline is still full. Developing a reputation as a late-bloomer, the company has continued its dominance of the end-of-the-year FDA approval rush. In 1989, it got two late-year approvals in the anti-arrhythmic Decabid and the antihypertensive Pindac. In 1988, Permax and Axid were approved; 1987 saw the go-ahead for Prozac and Levatol (eventually outlicensed to Reed & Carnrick). Prozac (with sales approaching, and maybe beyond, $300 mil.) has been anything but prosaic. It is being viewed by the investment community as a harbinger for the new generation of brain/neurological drugs on the horizon. Alex. Brown analyst Adele Haley exemplified the Street view of Prozac and the new Lilly allure in a "strong buy" recommendation Oct. 25. "We continue to consider Prozac's market opportunity for treatment of depression to be enormous," Haley declared, forecasting sales of $450 mil. by 1991, without any new indications. "We believe Lilly possesses one of the most powerful and comprehensive technology bases in the life sciences," Haley said, "and has improved significantly its worldwide competitive situation." While basking in rave reviews from the investment community, Lilly quietly has tried to ride out a series of shortages plaguing a number of its products. Most of the shortages stemmed from the shutdown of a tablet manufacturing facility (Building 100) in Indianapolis in August following a critical review by an FDA inspection team. Lilly shut that plant down at the beginning of September and did not begin reshipping products from it for almost two months. The company also experienced a packaging difficulty with the Faspak system for its hospital antibiotics during the autumn. The shortages and the lingering recalls of products previously made at Building 100 have made a difficult time for Lilly in the second half of the year. The manufacturing review is apparently dovetailing with line-paring: for instance, the firm is withdrawing from the nitroglycerin market ("The Pink Sheet" Jan. 1, T&G-1). Lilly maintains that none of its major products have been affected by the production difficulties. To Wall Street, those assurances have more than sufficed. Glaxo, selling over $3.5 mil. dollars of Zantac per day in the U.S. on the way to a $1.3 bil. domestic volume, finds itself with the Midas touch in which even unlikely outside events seem to benefit the firm. The trade confusion over Lilly's product situation may have helped Glaxo in the ceftazidime wars, where its Fortaz brand goes head-to-head with Lilly's Tazidime. Similarly, a formulation problem with Boehringer-Ingelheim's Alupent inhaler (metaproterenol) took that product out of distribution for several months at the end of 1989 and may have encouraged some switching in the asthma market to albuterol, of which Glaxo has one of the two brands. Alupent has recently reentered. With its meteoric growth of the last five years, Glaxo has built its range of products and sales infrastructure (a detail force of over 2,000 in the U.S.) to the point where it may better able to pursue the occasional product openings. That breadth, however, doesn't seem to be the market's main focus on Glaxo: Their question is whence cometh the next Zantac? The questions about future continue to retard the stock's performance in the face of a product success. Glaxo's American Depository Receipts were up a healthy 35.1% in 1989 to 26, but the company was outperformed by a number of firms with total product lines of less size than Zantac. * In the wake of SmithKline's fall from grace, analysts remain skittish about the prospects for any company to manage and perpetuate success in the drug business and that detracts from the investment picture for a company no matter how well it's doing. Thus, in early December, Shearson Lehman British analysts were able to characterize Glaxo in a headline as a company "Between Product Cycles." In Glaxo's case, however, there are attractive new drug prospects, headed by sumatriptan -- a product aimed at the largely untapped migraine market. Sumatriptan is being developed in both injectable and oral formulations. The injectable version is ahead of the oral in development ("The Pink Sheet" March 6, T&G-2). Shearson Lehman is forecasting a potentially large market for sumatriptan ($750 mil. annual U.S. sales within 3-5 years after launch); but the skepticism of followup successes remains firmly entrenched. "Our beliefs that sumatriptan may not be launched in the U.S. before 1993-94 and that Zantac may begin to decline by that time challenge best expectations," the same analysts caution. Merck had almost broken the boom-trough image of the industry with the Street; but at its annual public appearance in November, the firm indicated that its 25% annual earnings growth rate was not inviolate. At the time of that disclosure, Merck was up to its high end of its range for the year at around 80; it immediately slipped back to the mid 70's and ended the year at 77-1/2. Both Merck and Glaxo abjured interest in acquisitions during the year ("The Pink Sheet" Nov. 30, T&G-6), but Merck has begun playing a trading game with its established products much like an astute baseball executive. Merck is trading its mature products as trade bait for younger prospects: Sinemet to Dupont for rights to angiotensin II antagonists; and Elavil and $395 mil. in cash to ICI for Mylanta to help launch the J&J-Merck Consumer Products joint venture. On the other side of the acquisition game in the drug industry, a number of firms continued to move up despite declarations of independence. Schering-Plough, for example, belittled the merger trends noting that "mass does not equal class" and then a month later put its Maybelline cosmetics firm up for sale. The market continued to like Schering's prospects, pushing the stock up 50.7% to 85-1/2. Schering's approval profile has flagged over the last several years which, ironically, leaves the firm with an interesting short-term portfolio of possible new products. The non-sedating antihistamine, Claritin, the vasodilating beta-blocker Unicard, and the once-daily theophylline Uni-Dur have all been predicted for approval in past years and are still pending -- even after FDA's end-of-the-year push. The other firms under continual marriage scrutiny performed well: Rorer (up 10% on top of a 77% spurt in 1988, to close 1989 at 46-7/8); Syntex (up 24% to 50-3/8); Upjohn (up 33.9% to 38-1/2) and Warner-Lambert (up 47.4% to 115-1/2). Warner-Lambert stayed aloof and aloft, loping along on Lopid expansion. The product is a $300 mil. franchise already and has three more years of exclusivity. Among new product development projects, its Nicolan entry into the nicotine patch race, a product developed by Elan Pharmaceutical, received its first approval at the end of December, in Ireland. The company continues to display superior continued financial performance, with profits up over 21% through nine months. As a company, it gets some of the best performance from some of the oldest product names. Listerine, for example, continues to grow as the all-purpose solution to the latest oral germ anxieties. In the 1970s, it was a cold germ killer; now, it is anti-plaque and anti-gingivitis agent. It generated $180 mil. in sales through nine months of this year -- just short of 1988's full-year total. Abbott (up 41.3% to 68) doesn't draw much attention as a merger partner, but maybe should. During the eighties, it was a steady and well-appreciated performer on Wall Street. The only blemish has been a prickly management image, compounded by several abrupt changes in the order of succession for Chairman Robert Schoellhorn. The succession difficulties were finally resolved in mid-December, with the selection of insider-financial officer Duane Burnham to take over Schoellhorn's spot as chief exec on Jan. 1. In the period of intra-industry mergers (as opposed to the Kodak-style buy-ins which are becoming more costly and risky for the acquirer), Abbott would be strong partner for any firm primarily in the drug business. From Abbott's point of view, it has long wanted to be a full participant in the drug industry. A like-sized partner with a substantial prescription and/or OTC business could create a broad-based company on the model of Johnson & Johnson. The three big mergers of 1989, of course, were SmithKline Beecham, Bristol-Myers Squibb, and Marion Merrell-Dow. Also finally going into effect was American Home Products' long-delayed purchase of A. H. Robins, consummated in mid-December. SmithKline Beecham (closing at 48-7/8) is slowly moving through its first stages of combination, but it has had some boosts to help it along the troublesome trans-Atlantic, cross-cultural integration. At mid-year, the company found itself in the cat-bird seat with a renewed Dyazide monopoly. The sudden deterioration of that cash cow a year before was one of the steps leading to SmithKline's loss of independence. The reemergence of the monopoly was an unexpected post-merger treat. SmithKline Beecham is also going to get a crack at breaking into the thrombolytic market. Its newly-approved Eminase will be one of the first tests of the combined sales ability of SK&F and Beecham in the U.S. The product is now being shipping to the trade (priced at $1,700 per dose, about a $300-$500 discount to Genentech's TPA product Activase). Tagamet is also scheduled to soon get co-promotion from the sales forces. At Bristol-Myers Squibb (up 23.8% to 56), the merged businesses provide a decade's worth of opportunities for consolidation. Should either of the businesses start to go flat, there are probably plenty of options for efficiency adjustments. One detail of the combination of Bristol and Squibb, for instance, poses the dilemma for the new managers of the mega-pharmaceutical firms: does a company really need two oncogene labs? Both Bristol and Squibb were out on the cutting edge of that research effort, but in different locations, with different staffs. Does the combined firm have to keep each operation going separately? Can they be folded together? Or is one kept and the other closed? The Marion Merrell-Dow merger may be simpler. The firms were leaner at the start. The challenge here is two-fold: the sustainability of the $600 mil.-plus Cardizem, the $200 mil. Carafate and the $230 mil.-plus Seldane markets; and the globalization of Marion building on Merrell-Dow's considerable international business. The new merged business ended the year at 27, up a calculated 66% over what the combined price would have been at the end of 1988. The calcium channel blocker Cardizem got a bit of a reprieve with the launch of Cardizem SR and Bolar's attention being diverted by the generics scandal from its planned full NDA for a generic version. Carafate hopes are pinned on taking the ulcer product OTC with the aid of Schering's sales force. Johnson & Johnson is beginning economy moves under new Chairman Ralph Larsen, cutting management layers and excess production facilities and making progress in its drug business. An example of the first cuts was announced in mid-October in a reorganization plan for the non-drug consumer business ("The Pink Sheet" Oct. 30, p. 3). The uptick in the drug business is epitomized by the launch of the Janssen non-sedating antihistamine Hismanal, which has been estimated at about in the $50 mil. range in its first year against Seldane. The company's Ortho division also had a productive approval year, adding three new products at the end of the year: Lutrepulse for infertility; Ortho Cyclen (a monophasic contraceptive); and a tampon miconazole product. None are likely major products, but they indicate a renewed vigor in the J&J drug development effort -- recently consolidated under the guidance of the RW Johnson Research Institute. On top of its own projects, a resolution of the arbitration with Amgen could add the Eprex brand of EPO as icing on the 1990 cake. Pfizer, which gained 19.8% to close at 69-1/2, also has steadfastly denied its merger candidacy. By virtue of staying the course and on the merits of its full pipeline, the stock had a more than 10-point run-up from January until its peak in late November. Pfizer slipped toward the end of the year, however, after the company said it expected a "modest decline" in fourth quarter earnings and divested its 30% interest in DeKalb Genetics. Pfizer's big launch for 1989 was Procardia XL, the extended release nifedipine using Alza's GITS controlled-release system. Waiting in the wings for FDA approval are the non-sedating antihistamine Zyrtec, the antifungal Diflucan, the beta-lactamase resistant antibiotic Sulperazone, the calcium channel blocker/antihypertensive Norvasc and another Alza GITS drug, the antihypertensive Minipress XL. A hot prospect for 1990 is the sepsis treatment Xomen E-5, being developed with Xoma. Alza, one of the top three gainers among the pharmaceuticals component of the Index, finally appears poised to reap the rewards of its GITS, OROS and transdermal drug delivery systems' uses in a variety of drug firms' forthcoming products. Cashing in on the stock's extraordinary good fortune (a 96.1% increase to 43-7/8), four Alza insiders, led by co-Chairman and CEO Martin Gerstel, sold a total of 164,176 shares in November for prices ranging from 39 to 40-1/4. Gerstel, who divested 94,176 shares, received $3.8 mil. Felix Theeuwes, senior VP-R&D, got$1.2 mil. for selling 31,000 of his Alza shares. Drug distributor McKesson had an interesting year: the firm's top execs fought among themselves, the PCS division fought with McKesson's main customer base, and the firm emerged with a 14.5% market gain to 35-5/8. The internecine fight apparently revolved around the future of the prescription processing subsidiary, PCS, and led first to the departure of the exec in charge of PCS, Donald Dahlin, and eventually to the replacement of McKesson Chairman Tom Field. By the end of the year, the firm had decided to purchase back the 14% of PCS that had been spun off earlier in the decade and had appointed an insider management team headed by Alan Seelenfreund as chairman and Rex Malson as president. The PCS subsidiary acted to cement its relations with pharmacy by bringing on former California Pharmacists Association exec VP Robert Johnson as president. PCS may have been one of the firms most directly benefited by repeal of the Medicare outpatient drug program: the firm was reportedly preparing to compete to be one of the three regional claims processors. The effort, necessary to protect its private claims franchise, would probably have entailed a costly leap. Bergen Brunswig, the nation's second largest drug wholesaler, followed last year's 56% gain with a solid 33.6% increase, up 6-1/8 to 24-3/8. The stock split five-for-four in early September, after trading in the 33 range. Bergen's string of double-digit sales and earnings gains in fiscal 1989 combined with heightened investor attention to the importance of the drug wholesaler segment appeared to have helped boost the stock. Walgreen stood head and shoulders above the other six chains in the "F-D-C" Index in market performance and added to a field which has been bothered during the last two years by headlines of buyout debt and an alleged illegal payment by Rite Aid. Walgreen's stock soared 54.5% to 46-3/4 in 1989, closing the year up 16-1/2. The sterling performance marked quite a reversal from 1988, when Walgreen slid 1.6%. During the fiscal year (ended Aug. 31), sales reached $5.4 bil. from 1,484 drugstores nationwide and in Puerto Rico. The company plans to add 600 more stores in the next five years.

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