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TAGAMET ADVISORY COMMITTEE REVIEW AT FDA IN SEPT. HELPS SMITHKLINE BEECHAM's

This article was originally published in The Tan Sheet

Executive Summary

TAGAMET ADVISORY COMMITTEE REVIEW AT FDA IN SEPT. HELPS SMITHKLINE BEECHAM's stock to buck the gloomy outlook on Wall Street for pharmaceutical stocks during the second quarter of 1993. For the three-month period ended June 30, SmithKline Beecham stock edged ahead 9% on a 2-3/8 gain to 28-7/8, which compares to the "The Tan Sheet" Index' gain of only .7% in the quarter. Anticipation of a joint FDA advisory committee meeting on cimetidine in September ("The Tan Sheet" May 31, p. 1) has helped offset concerns about the effect of the 1994 patent expiration of the product in the U.S. SmithKline Beecham had "buy" recommendations from two of the three analysts following the company at the end of June, according to Zacks Investment Research. Alex. Brown analyst Barbara Ryan had SmithKline Beecham as one of only two "strong buy" recommendations she had out for drug stocks at the end of June; the other is Merck. Morgan Stanley (U.K.) analysts Duncan Moore and James McKean recommended "selective purchasing" of SmithKline Beecham in an April 22 report based on the stock's relatively low price and "several sources of upside surprise," including two antiviral drugs in development, the potential Rx-to-OTC switch of Tagamet and the more remote possibility of a terfenadine (Marion Merrell Dow's Seldane) switch. In a cautious review of the prospects of the two potential switches, the Morgan Stanley analysts said that SB's consumer business is "at a crossroads." They suggested that "if Tagamet and Seldane are de-listed for OTC sales, then the consumer division will be launched into a new phase of sustainable growth." However, they added, "there is no guarantee that either product will be de-listed by the FDA, as drug interaction or symptom-masking problems could override the positive arguments." The Morgan Stanley analysts rated Tagamet's switch chances as "good" but a Seldane switch, they suggested, "seems improbable at this stage" given the drug's interaction problems with certain anti-infectives. The upcoming switch advisory meeting is a double-edged sword for SmithKline Beecham. While ostensibly good news that FDA's review is progressing, the advisory committee meeting also provides an event for lottery-style betting up or down on the stock. Recently, FDA advisory committee reviews appear to be attracting more intense investor attention than in the past, creating more stock price volatility and what amounts to a betting environment surrounding the outcome of the meeting. A recent example is the heightened reaction to the advisory committee review of Syntex' naproxen ("The Tan Sheet" June 7, p. 1); a split vote turndown by the joint Nonprescription Drugs and Arthritis Drugs Advisory Committees was greeted as an outright rejection of the switch application. Syntex stock, among the most battered of the drug stocks over the last six months, lost another 10% of its stock valuation in the days following the committee review. Clearly, a favorable review would benefit SmithKline and help resolve the uncertainties that have surrounded the cimetidine switch since SmithKline began publicly discussing its plans for OTC Tagamet in the mid-1980s. However, difficulties in finding an appropriate and effective OTC dosing level and defining OTC indications as well as Tagamet's drug-drug interaction profile are issues that may come up in the committee review. In addition, FDA's Nonprescription Drugs Advisory Committee has served notice that it expects a higher standard of data submission than FDA has sometimes required in the past for OTCs. In SmithKline Beecham's favor is the growing international momentum for a cimetidine switch reflected in a July 6 proposal by the U.K.'s Committee on the Safety of Medicine to make the drug available over-the-counter in that country (see story, p. 1). The company predicts that the proposal "will give SB the ability to market OTC cimetidine by the end of 1993" in the U.K. The strongest performer among the large cap drug stocks in the second quarter was Schering-Plough (up 16.3% on a 9-3/4 gain to 69-3/4), which also received good news during the quarter about a potential switch candidate, albeit a much longer-term project. In mid-April, Schering-Plough launched its prescription nonsedating antihistamine Claritin (loratadine) after a four-year delay in receiving FDA approval. The relabelings of MMD's Seldane and J&J's Hismanal last summer for potential drug interactions and cardiovascular side effects has created an unexpected hole in the prescription market and, down the road, may provide Schering- Plough with a leg up on the competition for an OTC switch. Schering also is benefiting from FDA's slow progress on bioequivalence guidelines for generic albuterol inhalers and for topical clotrimazole, the active ingredient in Gyne-Lotrimin and Miles' Mycelex. As a result, while J&J's Monistat 7 is now facing private label miconazole products from Perrigo/Copley, Gyne- Lotrimin has avoided private label competition. The first private label version of Gyne-Lotrimin is expected to emerge this fall (see related item, In Brief). Not surprisingly, Chattem (off 61% on a 16-1/2 point drop to 10-1/2) lost the most ground during the quarter among stocks listed on "The Tan Sheet" Index following the company's completion of a $ 20 special dividend to shareholders in June ("The Tan Sheet" May 24, p. 17). The dividend deal included a $ 108 mil. payout in mid-June to shareholders of record on June 4. Chattem said when it announced the deal in May that the dividend would allow shareholders "to realize in cash approximately 80% of the bid price for their shares" while retaining a stake in the company's future. The payout was funded, in part, with a $ 100 mil. loan from First Union National of North Carolina, which also received a 25.6% equity stake in Chattem in return for the loan and $ 14 mil. in cash. The announcement of the deal boosted the price of Chattem stock from around $ 25 to as high as $ 32. However, the stock returned to earth once the deal was completed, sinking under $ 8 a share before closing the month at 10-1/2. Chattem continues to rebound, climbing above $ 12 a share during the first week of July. Chart omitted.
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