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Executive Summary

Lilly, adding 18-1/2 to 83-1/8, was the big gainer among the top pharmaceutical stocks in a resurgent second quarter. The company's nearly 30% increase in its stock price was fueled by continuing strong market expectations for the antidepressant Prozac with a boost from the device side of the business where Lilly's Advanced Cardiovascular Systems is looking at a potential windfall in the wake of Bard's withdrawal of its entire angioplasty catheter line from the market. The second quarter increase handily made up for the 3-7/8 slide in the first three months of 1990, when Lilly's 5.7% decline followed the pattern of the majority of drug stocks in their sluggish start to 1990. Prozac reflected its marketplace success as an antidepressant with its stimulating effect on Wall Street. The drug's appearance on the front cover of a late March Newsweek coincided with the first signs of positive movement on Wall Street and presaged the start of a general run-up for the drug stocks. In addition to Lilly, seven of 28 pharmaceutical stocks tracked by the "F-D-C" Quarterly Index climbed by more than 20% in the second quarter. For the three-month period in general, healthcare stocks were a favorite pick on the "Street," benefitting, like the rest of the market, from a seven-week surge that began in late April. Joining Lilly in the second-quarter surge with greater than 20% gains were Elan; U.S. Bioscience; Warner-Lambert; Merck; and trio of generic drug markets -- Par Pharmaceutical, Mylan and Biocraft. Bristol-Myers Squibb was close, with a 19% gain, rising 10-1/8 to 63-3/8. Based on Prozac's performance to date and its increasing acceptance as a standard treatment for mild-to-moderate depression, Alex. Brown's Adele Haley upped Prozac's 1990 estimates on June 21 by another $100 mil., to $700 mil. She also awarded Lilly a "1" ranking for growth and put the company on Alex. Brown's "Emphasis List." The real impact of the drug's success may be seen in the pipeline's of other major companies in the antidepressant area, where projects outside the serotonin reuptake inhibitor class are being given tough reviews ("The Pink Sheet" June 4, p. 11). Lilly reported in May that Prozac is "approaching" a 50% dollar share of the antidepressant market in the U.S. and over 20% of prescriptions. While the company has downplayed Prozac for anti-obesity usage, anecdotal evidence suggests that the drug is developing an off-label use pattern in some geographic areas for weight reduction. To differentiate fluoxetine's antidepressant and anti-obesity usages, Lilly reportedly plans to market the drug for weight control under the tradename Lovan. Lilly's success in the second quarter also appears to result from a unique opportunity in the balloon angioplasty market opened by Bard's March decision to pull its remaining products off the market. Bard, which had been Lilly's biggest competitor in the angioplasty catheter field -- with an estimated 30% share of the market versus Lilly's 40% -- so far has reintroduced only one product since regulatory problems first surfaced in August 1989. The vacuum created leaves Lilly as the major player in the balloon catheter field. Lilly is far larger than other players like Cordis and SciMed. Lilly also warmed Wall Street with financial strength, announcing April 16 a $1 bil. stock and outstanding warrant repurchase program. Lilly's current warrants are due in March 1991, which will result in the issuance of 26 mil. common shares and a windfall of about $1 bil. In the week following a strong interim operating report and the buyback announcement, Lilly stock gained 2-3/4. Elan (up 54.9% with a gain of 7 to 19-3/4) was the top percentage performer among all components of the "F-D-C" Index -- pharmaceuticals, diversifieds, chains and wholesalers. On May 28, the firm got its first approval for its smoking cessation transdermal patch (Niconil) in its home base of Ireland. Elan stock jumped 1-7/8 in the week after the launch was publicized here by worldwide licensee Warner-Lambert, which filed its own NDA for a nicotine patch in August. Warner-Lambert, meanwhile, had a strong showing itself in the second quarter, adding 13-1/2, a 25.8% increase. The gain more than made up for the 9.3% drop in stock price in the first quarter. The company ended the quarter at 65-7/8, up 8-5/8. The stock split two-for-one the week of May 11. W-L had a high profile filing on June 4 with the NDA submission for it Alzheimer's drug Cognex (tacrine or THA). W-L has a high visibility project in that area but it faces a less visible but larger development effort by the large German company Bayer and its U.S. subsidiary Miles (see related story, T&G-5). W-L's current star Lopid, the cholesterol lowering agent, had 1989 sales of $285 mil. and held a 31% share of the market. To stem a slight slowdown in growth, Warner-Lambert earlier this year said it would be spending 35% more on Lopid ads and promos than last year. Merck shot ahead 17-1/4 points (24.8%) in the second quarter as Losec moved closer to a full competitor in the anti-ulcer market. The product sailed smoothly through an FDA advisory committee review on May 25 and came away with a recommendation for duodenal ulcer indications. The company's publicized lead in price discount discussions with Medicaid has not tarnished its image with the profit sensitive financial community. Merck's discount offer is apparently read as a sign of strength (of the company's broad single-source offerings), a short-term opening for Mevacor in the potentially large California market, and a long-term assurance for Merck's new product flow. Glaxo also had a successful visit with the FDA Gastrointestinal Advisory Committee in late May with its ondansetron (Zofran) anti-emetic earning the committee's blessing. The firm is holding to a difficult development schedule for its next two products: ondansetron and sumatriptan (injectable NDA filed July 2). But the market appears skeptical as Zantac passes its seventh anniversary on the U.S. market. A trio of 20%-plus generic drug stock gainers was led by Par (up 1-1/2 to 7-7/8). Par's 23.5% increase is one of the surprising bets and reflects a high degree of confidence in the new management group under the leadership of Par President Kenneth Sawyer. The stock bounce-back came despite the recall of 93 lots of 15 drug entities from Par's Quad subsidiary announced late in the first quarter. Mylan (up 4-3/8 to 24-1/8) fought off rumors in mid-June that it had made unapproved formulation changes. The firm reportedly has been getting a heavy load of FDA inspections since complaining about generic review procedures, including a 10-day review in mid-April. The April inspection of Mylan concluded with a short two-page handwritten set of observations by the FDA investigator alleging that supplemental applications had been filed with FDA but that marketing had begun prior to actual approval of supplements. Mylan answered those observations in late April and noted that "there has been confusion within the FDA and in the pharmaceutical industry regarding requirements for manufacturing changes." Biocraft was up 2-7/8 for the quarter to 16-7/8, a 20.5% gain. The stock bottomed out for the quarter in April when it slid from its March 30 closing trading price of 14 to the high 12-13 range. The dip coincided with the settlement of the Bristol-Myers Squibb cefadroxil patent dispute under which Biocraft agreed to pay what Bristol said was $21 mil. As it had projected at the time of settlement, Biocraft took a big one-time hit on earnings, which showed up as a $7.9 mil. loss reported on June 6. Bolar's outlook continues to deteriorate. Since the beginning of the year Bolar has lost more than half its value, dropping 12 points from its 1989 close of 18-1/4. The company's financial picture is likely to show losses for at least the remainder of the year.

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