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Executive Summary

Barr Labs and American Cyanamid are two of the investment community's pharmaceutical favorites at mid-year: Barr riding a resurgent profit picture to a 23% gain (3-1/2 points) in the second quarter; and Cyanamid advancing 23.4% (12-1/4 points) on its restructuring and continued medical products growth. At the mid-way point of 1991, Barr has more than doubled its trading price from an 8-7/8 close at the end of 1990. Its June 28 close at 18-3/4 gives the company a market valuation of about $ 150 mil. Through nine months (March 31), Barr sales are up over 31% (to $ 69.6 mil.) and after-tax earnings have jumped from $ 1 mil. to $ 3.6 mil. The company has a new infusion of cash also from a $ 30 mil. offering of 2001 notes placed by Furman Selz of June 28. American Cyanamid's upward movement was aided by an upgrade in rating in late May by Merrill Lynch. Lederle's perseverance in the politically tricky vaccine field is paying off with praise for its HibTITER haemophilus b conjugate. Merrill Lynch cited the growth of HibTITER and the controlled release verapamil, Verelan, as bright spots in Lederle's performance. Merrill Lynch analyst John Roberts credited Verelan with 12% of new calcium channel blocker prescriptions and over 5% of total prescriptions in that field. Both Barr and Lederle managed to survive a June swoon by the market that took away many of the 1991 gains and dragged down second quarter performance for more than half of the 51 issues tracked by the "F-D-C" Index of NYSE and AMEX-traded stocks. Twenty-six issues were losers in the second quarter. Eleven issues lost more than 10% of their market price during the dip, including first quarter standout Johnson & Johnson, which retreated 12-3/8 (12.9%) during April-June trading. The 30-issue pharmaceutical component dropped 1.5% in the second quarter; the overall 51-issue index dropped 2.2%. The strongest group showing was turned in by the chain drug stocks. Five of seven stocks were up, led by a 20% gain (1-1/4 points) by Perry Drug and a 15.5% jump (1-5/8 points) by Genovese. A favorable profile in the June 24 issue of Barron's helped Walgreen regain a little ground at the end of the quarter, but the issue was still off 3/8 (down 1.1%) to 33-1/4 for the three-month period. Barr's gains, ironically, may be attributable partially to its sales of the generic version of one of the prominent drugs of the other big gainer. A generic version of Lederle's methotrexate tabs has been providing some new product sales for Barr since late last year. Approved in October 1990, Barr's methotrexate and erythromycin estolate (oral suspension) broke a long ANDA dry spell for the company. Barr has not had any ANDAs approved since those clearances. There are some recent signs that the venom may be receding from Barr's bias charges against FDA. Barr's charges elicited three reports on the generic drug review process by a group of consultants headed by APhA's Arthur Kibbe. The Kibbe "retaliation" report appears to provide a way for the bias allegations to be resolved. The consultants exonerated FDA of charges of vendettas against specific companies but at the same time noted that the agency does appear to have inconsistent approval criteria that make it harder for some firms to get approvals than others ("The Pink Sheet," May 13, p. 4). The conclusion of the bias argument would remove a major distraction for Barr. Mylan, the other generics firm complaining of retaliation, has been receiving ANDA approvals this year; but, in the second quarter, that did not help its stock performance. The issue slipped 2-5/8 points, or almost 10%, to 24-1/4 in the second quarter. Another small generic firm, Halsey, was a 25% net gainer on a one-point rise to 5 during the quarter. The firm acquired a majority stake in H.R. Cenci Labs, a Fresno, Calif. generic drug liquid and powder manufacturer in late June. While Lederle's vaccine business has provided some immunity from general market downturns, the company faces some significant new challenges in that area. In the oral polio vaccine field, Connaught Labs appears poised to enter the U.S. market based on a recent FDA reg that permits use of World Health Organization test standards in addition to existing U.S. standards. Lederle is rounding up a broad medical- political coalition to continue to fight that change ("The Pink Sheet" June 17, T&G-8). Connaught also may be a rejuvenated competitor in other vaccine fields in the future if the joint promotion/joint venture agreement between Merck and Connaught's parent Merieux succeeds. The June 17 agreement could create a joint venture company with a simplified and more commercially attractive immunization schedule. The vaccine deal is another in the growing line of joint ventures/joint arrangements involving Merck. The industry's largest company is swinging its weight around in a subtle fashion -- using Merck's size and resources as an attractive negotiating position in a broad variety of fields and deals. The unusual aspect of the Merck deals to date is that most are with established, larger companies in the industry and not with the research boutiques. In addition to the vaccine arrangement, Merck worked out a joint clinical trial in the promising prostate field. With Abbott, the firm agreed to cosponsor a combined trial of Proscar (finasteride) and Hytrin (terazosin) against benign prostatic hyperplasia ("The Pink Sheet," June 10, p. 7). If it works, the trial could make the two agents complementary treatments instead of either-or competitors. The arrangements make Merck's prospects more difficult to calculate for the investment community. The joint ventures cannot be as easy to project through to earnings, but they have not dimmed the enthusiasm for sustained results. Merck was a 10% net gainer for the second quarter, closing at 116-1/8 up 10-5/8 points. The issue is up 27-1/4 for the first six months. Abbott was also a gainer for the quarter, adding 3-3/4 points to 51-3/4 for a 7.8% gain. As the quarter ended, Abbott continued to carry a high "timely" rating on the ValueLine investment survey. The investment service projects 15%-20% volume growth in Abbott's drug business through mid-decade, based on Hytrin's added indications and two new antibiotics, clarithromycin (see related brief this issue) and temafloxacin. Abbott reportedly has been discussing comarketing arrangements for temafloxacin; ICI is one mentioned possible partner. The drug business is icing on top of Abbott's steady foundation in diagnostics and hospital supplies. Glaxo was virtually flat for the second quarter, closing at 40-1/2 (2.2% ahead). The company survived a skeptical cover story in Barron's in mid-June. Glaxo has been aggressive in its assurances to the financial community on the long-term prospects for Zantac and for the market size for sumatriptan, Imitrex (see related story, T&G-7). The Barron's article aired some of the questions about the ranitidine patent, Glaxo's migraine treatment, the asthma market and beta agonist therapy and the ondansetron patent challenge by SmithKline Beecham. Despite the nascent naysayers, Glaxo still has its strong advocates in the investment community. Wedbush Morgan's David Saks is one of them. In a June 20 "buy" recommendation, Saks maintained that Glaxo should command a 20% premium P/E level. The Wedbush analyst went out on a limb to project estimates for Imitrex in the $ 2-$ 3 bil. annual sales range "within seven years of introduction." One sign to watch in the second half investment climate for the drug business will be the potential impact of the enforcement publicity emanating from FDA. The stories of tough FDA positions on drug promotion programs are already starting to have a noticeable spillover effect onto general media treatment of the industry -- leading to more front page stories on marketing plans superceding safety decisions (Roche's Versed, The New York Times, July 4) or price differentials without significant performance differences (Genentech's TPA Activase, The New York Times, June 30).

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