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Executive Summary

Mylan Laboratories is getting significant FDA approvals again, and the market is taking notice. The company's ANDA for piroxicam contributed to an inflamed interest in the stock in the third quarter as Mylan posted a 5-3/4 point (29.1%) gain to close Sept. 30 at 25-1/2. The July 31 approval of piroxicam (equivalent to Pfizer's nonsteroidal anti-inflammatory Feldene) capped a string of generic approvals for Mylan. The firm's bumper crop of 1992 approvals includes generic versions of the anti-cancer agent methotrexate, Marion Merrell Dow's Cardizem (diltiazem), Warner-Lambert's Lopid (gemfibrozil) and Ciba-Geigy's Lopressor (metoprolol). The Street's enthusiasm for Mylan's new product flow helped the company to show the largest July-September point gain among the 30 stocks tracked in the pharmaceutical component of the "F-D- C" Index of NYSE and AMEX issues. Among drug companies, only Enzo Biochem (up 1 to 4-7/8) posted a higher percentage gain: up 25.8%. Despite several approvals early in 1992, Mylan ended the first half of the year up just 1/4 point at 19-3/4 (taking into account a July two-for-one stock split). With the exception of methotrexate, all of the earlier approvals are tentative: Marion Merrell Dow's Cardizem patent does not expire until Nov. 5 and Lopid and Lopressor are both patented until 1993. Moreover, MMD, Warner-Lambert and Ciba-Geigy have announced that they will be making authorized generic versions of the products available prior to patent expiry. Mylan has not been a beneficiary of the authorized generic annointments. Rugby has been the primary choice by brand firms. With piroxicam, Mylan has an early entrant (second to Schiapparelli Searle's) into the estimated $300 mil. U.S. market for the product. The stock leapt from 22 on July 31 to as high as 24-3/4 the following week when the approval was announced. Mylan added still another approval in late August: the first generic version of the Sandoz beta blocker Visken (pindolol). The stock climbed as high as 27-1/8 during the week of Sept. 21. In addition to its emergence as the top publicly-traded player in a resurgent generic drug industry, Mylan has been gaining recognition for its branded products. The firm continues to receive revenues from the anti-Parkinson's agent Eldepryl, marketed in a joint venture with Bolar. The recent acquisition of Dow B. Hickman also has been viewed as a positive by the Street. According to Zack's Investment Research, 14 of 16 analysts who follow Mylan rate it a "strong buy" or a "buy." Despite this enthusiastic support, Mylan could not escape a general flight from health care stocks on Sept. 25, falling 1-1/4 points to 25-7/8. Mylan was caught up in a wave of selling as lingering concerns about a toughening environment for drug companies crystallized into panic at the prospect that Gov. Clinton (D-Ark.) would win in the November presidential election. The breadth of the political sell-off is indicated by the flight from generic companies as well as brandname manufacturers. A price conscious administration used to be considered by the Street as good growing times for the generic companies. The rationale for the thesis that a Clinton presidency (and attendant health care reform) would be bad for medical stocks was laid out in an Aug. 27 Salomon Brothers report. "We believe that a Clinton presidency would cast a cloud of concern over the industry, dampening stock and bond performance throughout Congressional debate -- almost regardless of the ultimate outcome," Margo Vignola, Mariola Haggar and Edward Mally wrote. "Four more years of Bush would signal a more studied pace of change and a positive for health service and pharmaceutical stocks and bonds." At a Sept. 24 appearance at Merck headquarters, Clinton reiterated his support for legislation to eliminate tax breaks for companies that raise prices on existing products faster than inflation ("The Pink Sheet" Sept. 28, T&G-1). Although Clinton also had positive things to say about recovering full R&D costs for new products, health care stocks, and especially drug stocks, plunged the next day. The AMEX pharmaceutical Index dropped 4% on Sept. 25. The "F-D-C" Index' pharmaceutical component dropped 10% during the same week. Overall, the third quarter performance of pharmaceutical stocks was decidedly cloudy. Of the 30 drug stocks tracked by the "F-D-C" Index, 14 were up, 14 were down and two were unchanged. Most of the issues moved less than 10% up or down for the quarter. The pharmaceutical component of the Index was down 1.7%. By comparison, the Dow Jones Industrial Average was down 1.4% in the quarter, while the broader S&P 500 Index climbed 2.4%. Other sectors of the "F-D-C" Index fared better. Diversifieds were up 2.7%, with six gainers and five decliners. Chains leapt 13.8%, with five posting gains, two declines and one unchanged. Wholesalers were up 7.9%, with three up and two down. Overall, the "F-D-C" composite Index of 52 stocks in all four sectors was off .2%. Two of the biggest decliners for the third quarter, Syntex and Marion Merrell Dow, suffered from the perception that they are especially vulnerable to cost containment pressures, regardless of the outcome of the election. Each company faces a patent expiration for its leading product. Syntex (down 7-1/4, or 21.2%, to 34-1/4) has not convinced investors that its new products will replace revenues from its flagship NSAID Naprosyn following its 1993 patent expiry. Syntex' fiscal 1992 sales and earnings report for the year ended July 31 showed that sales of its follow-on NSAID, Toradol, were "essentially flat" from the third to fourth quarters. In addition to the imminent loss of expiry for Cardizem, Marion Merrell Dow (down 6-5/8, or 20.2%, to 26-1/8) was hurt by news that its nonsedating antihistamine Seldane was being relabeled to warn against concomitant use with erythromycin and the antifungals Nizoral and Sporanox. The new warning is viewed as a major blow to the company's plans to move the product OTC, although the company has not conceded its chances for a switch. On the continued possibility of an OTC terfenadine, MMD signed an agreement to fold its OTC efforts into SmithKline Beecham. Some scientists familiar with the terfenadine data indicate that the specificity of the side-effect profile may yet make the drug amenable to OTC use ("The Pink Sheet" Sept. 21, T&G-2). Merck's performance was typical of the drug industry majors during the quarter. The stock was fairly steady through the end of August, up a slim 5/8 to 49-3/8. In September, however, the stock swooned, dropping 4-7/8, including a 1-7/8 drop on Sept. 25. Merck closed the quarter down 8.7% at 44-1/2. As the pharmaceutical industry's biggest player, Merck is likely to reflect concerns about the future of the industry as a whole. However, the company also is facing analyst impatience with its newly-launched benign prostatic hyperplasia therapy Proscar (finasteride). On Aug. 31, Mabon Securities analyst James Keeney cut his rating on Merck from "buy" to "hold" based on lower-than- expected August prescription data. The financial community has been skittish about the prospects for the product, which represents a new class of drug targeted for treatment of a condition, mild BPH, that generally has been left untreated. Merck has attempted to keep analysts abreast of plans for the drug. Following the end-of-July launch of the five-alpha reductase inhibitor, Merck briefed analysts on its marketing plans. The company indicated that it expects that first usage of the product will be in patients with bothersome symptoms -- not those with severe symptoms who would be referred to a specialist or those who are as yet asymptomatic ("The Pink Sheet" Aug. 10, T&G-6). To help build patient understanding of the BPH problem and the new treatment, Merck appears close to undertaking a patient awareness campaign. The company met with FDA on Sept. 30 to discuss Proscar advertising. The company has never ruled out patient advertising for the product. Several drug and diversified companies survived the late September swoon to eke out gains for the quarter: Pfizer (up 1-3/4 to 74-3/4), Glaxo (up 1-7/8 to 27-1/4), Upjohn (up 7/8 to 32-7/8), Warner-Lambert (up 2-3/8 to 63-3/8), Schering-Plough (up 1-7/8 to 56-3/4) and Johnson & Johnson (up 2-3/8 to 47-1/8). Among chains, the strongest gain was turned in by American Stores (up 6-1/2, or 19.1%, to 40-1/2). Rite-Aid (up 3-1/8, or 15.7%, to 23) and Walgreen (up 4-3/8, or 12.9%, to 38-1/4) also had strong quarters. Moore Medical, up a whopping 68.8%, was the largest percentage gainer on the "F-D-C" Index for the quarter. The wholesaler was up 4-1/8 points to 10-1/8. Another wholesaler was the largest point gainer on the Index: McKesson was up 6-3/4 (21.3%) to 38-1/2. Bergen Brunswig remained stable during the quarter as it pursued and ultimately completed a $475 mil. cash acquisition of Durr- Fillauer. The stock closed down 1/4 to 18-7/8.

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