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McKESSON REGAINS MARKET MOMENTUM: MOVE INTO CANADA, PCS BUYBACK AND SHARE REPURCHASE PLAN SPUR 2-3/8 GAIN IN FIRST QUARTER; F-D-C INDEX SLIPS 5.6%

Executive Summary

McKesson is surging back into the investment community's favor, continuing to improve on the company's 1989 stock performance during the first quarter of 1990. The stock added 2-3/8 to close up 6.7% at 38 in the first three months of the year. The increase followed a gain of 4-1/2 points for all of 1989 -- a year that saw the drug distributor suffer through a public airing of trouble in the top executive echelons. That dispute in part revolved around the future of its prescription processing subsidiary, PCS. By year-end, McKesson had decided to buy back the 14% of PCS that was publicly traded and named a management team led by insider Alan Seelenfreund as chairman and veteran Rex Malson as president to succeed ex-topsider Tom Field. The firm signed the definitive PCS agreement on March 7. A segment of the PCS business, the data services operation Pharmaceutical Data Services, was sold to Walsh International during the first quarter. The real fuel behind McKesson's first quarter drive, however, was the company's Jan. 19 announcement that it was acquiring Canada's largest health care wholesaler, Medis Health and Pharmaceutical Services, Inc., for $81 mil. in cash and a $14.2 mil. equity investment. The deal, completed in the latter half of February, gave McKesson a company with annual revenues approaching $1 bil. and with control of about half of the entire Canadian drug distribution market. Medis represents an outlet for growth at a time when major U.S. expansion opportunities are constrained by government anti-competitiveness strictures (a la the thwarted 1988 effort to acquire Alco Health Services). Adding to investor confidence is McKesson's strong financial picture combined with the company's initiation of a plan to repurchase 3.7 mil. of its shares. Through the nine months ended Dec. 30, sales were 10.3% higher at $5.7 bil. and earnings were up 17.2% to $80.4 mil. Oppenheimer & Company analyst Joseph Frazzano put the company on his "buy" list in November and is predicting earnings growth of 10% to 12% in fiscal 1990. McKesson is moving while the rest of the wholesaler segment has slowed. The investment community apparently has cooled to the consolidation in the wholesaler area, although some merger activity continues. Cardinal Distribution recently paid $27.1 mil. for the purchase of privately-held Ohio Valley-Clarksburg, a Wheeling, W.Va. wholesaler with annual sales of approximately$190 mil. McKesson was the only wholesaler of the four publicly-traded distribution companies tracked by the "F-D-C" Quarterly Index to come out ahead in the first quarter (see chart on p. 17). It was also one of the minority of the 49 AMEX and NYSE stocks on the Index to to show a gain for the period: first-quarter declines were experienced by 39 issues, pulling the composite down 5.6%. The Dow Jones Industrials also slid, albeit at the lesser rate of 0.9%, during the first quarter; the S&P 400 was off 2%. In recent years, first quarter performance usually has been the weakest for pharmaceutical companies, and the impact of the plummeting yen compounded the problems of a cool investment attitude on Wall Street. * Like McKesson in 1989, a prominent feature of Abbott in the first quarter was a dispute at the top: Abbott is battling its former chairman Robert Schoellhorn in a nasty court dispute about the way in which that topside change was effected. Abbott also continues to wrestle with FDA about alleged regulatory problems on the parenteral side of its drug/device business. The tarnish on both sides didn't help Abbott's steady image with the financial community: the stock dropped 3.3% to 65-3/4 in the quarter. The company is seeking a Cook County, Illinois Circuit Court's permission to fire its ex-chairman "with cause," alleging that Schoellhorn misappropriated company assets and abused his position of power. A hearing on the case is slated for June 14. Rep. Dingell's (D-Mich.) House Energy & Commerce/Oversight Subcommittee is reviewing Abbott's response to FDA inspections of the firm's North Chicago small-volume parenteral manufacturing plant. FDA sent the company a 41-page reg letter on March 14 with a long list of adverse findings from an agency inspection of the sterile processing facility. Congressional interest in Pfizer's heart valve business combined with the attendent negative publicity, sent Pfizer stock down 12.8% (8-7/8 points) to 60-5/8. Despite the adverse media attention, the long-term impact of the Bjork-Shiley hearings is under debate. On Feb. 23, the Friday before company officials testified at a Dingell oversight subcommittee hearing on defects in the heart valve, Pfizer stock plunged to 56-1/4 from 66-3/8 on Feb. 16. By the Friday after the Feb. 26 hearing, the issue had recovered several points, to 61-3/4. While the company repeatedly has said that it has more than adequate liability coverage, some observers are skeptical. Barron's highlighted the bearish view in a lengthy article in its April 2 issue entitled "Legal Heartbreak? Pfizer Faces Huge Liability if It Loses a Key Lawsuit." On the other hand, Alex. Brown analysts Adele Haley and Richard Stover, the first to jump on the Pfizer bandwagon after the Bjork-Shiley story broke, view the depressed stock price as an opportunity for investors and give the stock a "strong buy" recommendation. In a March 2 report predicting that the Shiley situation will not be pursued further by Dingell, the two Alex. Brown analysts also called the liability concerns "grossly overrated." In an April 4 response to the Barron's article, Haley and Stover said "the article presented no new information that would alter our prior assessment about potential liabilities. The congressional interest in the Shiley valve story is tied to efforts to rekindle interest in medical device amendments and Dingell's continuing campaign to expose FDA regulatory procedures. More important for investors to look at in Pfizer, Haley and Stover argue, is the "outstanding" outlook for Diflucan, the antifungal approved by FDA on Jan. 29. The two analysts are calling Diflucan a "new standard" for antifungal therapy. Diflucan looks to be a strong addition to a line-up that already includes Procardia XL, a recently launched once-a-day calcium channel blocker. Shearson Lehman Hutton's Mary Ellen McCarthy has upped her 1990 projections for extended-release nifedipine to $150 mil., based on the higher than expected revenues of $40 mil. for the drug from its first four months of availability. Alza, the designer of the GITS delivery system used in Procardia XL, was down 3.7% to 41-1/4 (a loss of 1-5/8) in a quarter that saw the company make two important licensing announcements. In February, Alza signed a deal with P&G for Actisite periodontal disease treatment; On March 8, Alza disclosed that Merck was evaluating once-a-day diltiazem and a diltiazem/Vasotec combo that employ an Alza delivery system. Roche's stabilizing effect on Genentech's stock price is already evident. With a pending bid from the Swiss company, Genentech stock went relatively unscathed by the release of the GISSI-II data. That study was widely interpreted as showing tissue plasminogen activator (TPA) no more effective than streptokinase. That type of event would probably have precipitated a big drop in the stock prior to the Roche offer. The insulation of Genentech from the sharp ups-and-downs of the public markets is one of the tactical advantages of the Roche deal. The stock ended the first quarter at a price (25-7/8) below the estimated value of the Roche offer. Genentech reached the $28-$29 range in February after the Roche offer to acquire half of Genentech for $1.2 bil. At the current stock price, Roche's $36-a-share offer is looking better and better to Genentech shareholders. The Roche deal also had a run-up effect on NASDAQ biotech stocks on the "F-D-C" OTC Monthly Index ("The Pink Sheet" March 12, p. 14). Despite the fact that Lilly's Prozac was a "cover pill" in the March 26 Newsweek issue and is beginning to make the rounds on talk shows, Lilly closed the quarter down 3-7/8 at 64-5/8, a 5.7% decline. Syntex edged ahead of the market by gaining 1% to 50-7/8, up 1/2. The drug approval roll -- Toradol I.V., Cytovene and Cardene -- continued in the first quarter with the endometriosis drug Synarel. Toradol will get the help of the Roche sales force -- the partners in the Glaxo Zantac success. Upjohn, a perennial target of takeover rumors, if not takeover offers, also was up 1% (a 3/8 gain to 38-7/8). The rumors emerged again briefly in mid-March. Upjohn, which is teaming up with Chugai to market Genetics Institute's erythropoietin product Marogen, also got a boost from the Boston Federal Court judgement in the Amgen/Genetics Institute EPO case: the stock jumped 3-1/2 from 36 to 39-1/2 the week of Judge Young's March 14 ruling. Bolar continues to wrangle with Rep. Dingell. With the original management and a new group trying to revive the operation, the stock plunged 54.8% to 8-1/4, a drop of 10 in the quarter. Barr, meanwhile, rebounded from a 7.1% decline in 1989 to jump 53.8% through the end of March. Barr closed the quarter ahead 2-5/8 at 7-1/2. Biocraft was off 16.4% (to 14) as the negative effect on earnings of last year's recalls remain. The impact will be enlarged by the company's agreement to pay Bristol-Myers Squibb more than $17 mil. to settle the cefadroxil monohydrate patent litigation.
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