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Executive Summary

SmithKline Beecham is escaping the gloom and doom that continue to cast a shadow over most pharmaceutical stocks through the second quarter of 1992 as SBE equity units (the more actively traded of SmithKline's two U.S. stock issues) rose 10 points to close June 30 at 76-5/8. The 10-point jump was by far the biggest gain for the 30 NYSE and AMEX pharmaceutical stocks tracked by the "F-D-C" Index; the runner-up was Genentech with a 4-3/8 point gain, while 22 firms recorded losses. No single, high-profile event appears to have driven the SmithKline stock increase in the midst of a bearish atmosphere for drug stocks, suggesting that the stock's growth may be attributable, in part, to a perception that SB was one of the few undervalued pharmaceutical stocks available. SmithKline's news for the quarter included a June 16 announcement that it will manufacture and sell the Pasteur Merieux PRP-T Haemophilus B vaccine in the U.S. The firm said it intends to market the PRP-T vaccine in combination with several other pediatric vaccines. On a related front, an agreement to acquire a former East German vaccine manufacturer was announced in late April. The stock may have benefited from two positive analysts' reports issued during the last half of the quarter. A June 5 report by Mabon Securities analyst Jim Keeney cited Relafen's "fast start" in the U.S., which garnered an estimated 6% share of the $2 bil. antiarthritic market just two months after introduction as one of the factors driving his "buy" recommendation. Kidder, Peabody analyst Jerome Brimeyer headlined his May 7 report "SmithKline Beecham Has One of the Best New Drug Pipelines." He predicts that four new drugs -- Relafen; the serotonin reuptake inhibitor Paxil; the anti-emetic Kytril and Merck's cholesterol-lowering Zocor, which SB is copromoting -- will "significantly surpass expectations and more than offset a slowdown in the company's base business." Brimeyer cited a recent study suggesting that Paxil may have a superior efficacy and side effect profile compared to Lilly's Prozac and Pfizer's Zoloft and he projected potential sales of $1 bil. by 1997. An NDA for Paxil has been filed in the U.S. In addition, SB has avoided the negative fallout from the lost revenues of the Medicaid rebates by keeping mum on the subject. The firm is generally regarded as one of the most aggressive in dealing on prices and presumably has large rebates calculated on the "best price" formula. More than half the 18 analysts covering SB were as optimistic as Brimeyer; ten issued either "strong buy" or "buy" ratings for the stock in June, while eight were neutral, according to Zacks Investment Research. SmithKline's stock performance placed it in an elite group of six NYSE and AMEX pharmaceutical stocks to finish the first six months ahead of 1991 yearend figures. The handful of gainers include four generic firms -- Biocraft, Bolar, Mylan and Pharmaceutical Resources -- and Genentech. Genentech's 4-3/8 point gain to 31-3/4 occurred entirely in June, when most of the other pharmaceutical issues experienced the bulk of their losses. The contrary performance can be tied to two factors. Genentech announced in May that the fast development schedule for its recombinant human DNase cystic fibrosis drug should lead to a PLA filing in early 1993. The firm is predicting that DNase will be "the next major product for Genentech and from biotechnology." Genentech also stands apart from the crowd by being less vulnerable to the general concern over slow future earnings growth for pharmaceutical firms due to the potential $60 per share buyout by Hoffmann-La Roche in three years. Merck demonstrated that even good news -- in the form of the June 19 approval for Proscar -- will not necessarily make a dent in the market's pessimism. The company's stock price dropped 1/4 point for the quarter to 48-3/4 (after a 3-for-1 stock split in mid-May). The initial reaction to the Proscar approval reflected investors excitement that a product predicted by Merck to be its next $1 bil. drug had been approved in a timely fashion. Following announcement of the approval on June 22, Merck climbed 2-1/4 to 50-1/2. However, suggestions that Merck may face a tough sell with Proscar given its unproven impact on the need for surgery led to second thoughts. By June 24, Merck had fallen below its pre- approval level of 48-1/4. Security analysts were also reported to react negatively to the $1.40 per tab price at wholesale for the product -- a price some analysts characterized as surprisingly low. The market may be overlooking the potential spillover benefits of Merck's coupon marketing plan for other products. Glaxo (down 1-3/4 to 25-3/8) may have been held back in the quarter by second thoughts about the potential for its new products. While the anti-emetic Zofran has posted strong sales so far, with the prospect of expanded indications in the offing, investors may have shied away from Glaxo based on a perception that its aggressive pricing practices make it particularly vulnerable to the pricing pressure facing the industry as a whole. A second new Glaxo product, the anti-migraine treatment Imigran, which is pending approval at FDA, has sparked controversy in European markets due to its high price. Syntex (down 11-3/4 to 34-1/4) suffered the most from the perception that future earnings growth would not meet expectations. The company's fiscal third quarter results, released May 26, triggered an 8-1/4 point decline over the next two weeks. Investors read the sales and earnings report as proof that the company's stable of newer products (Toradol, Synarel, Cardene and Ticlid) would not be able to replace the revenue decline expected when Naprosyn goes off patent next year. Syntex, however, is fighting to protect its Naprosyn revenue, both through an OTC joint venture with Procter & Gamble and by establishing itself as the leading bulk supplier of generic naproxen.

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