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This article was originally published in The Tan Sheet

Executive Summary

REXALL SUNDOWN LEADS DIETARY SUPPLEMENT SURGE ON WALL STREET during the third quarter of 1993 despite the regulatory uncertainties facing the industry. Rexall (up 75% on a 12 point gain to 28) was the pacesetter among a group of high-flying dietary supplement stocks listed on "The Tan Sheet" stock index during the third quarter that also included Nature's Bounty (up 47.9% on a 5-3/4 point gain to 17-3/4) and General Nutrition Companies (up 45.1% on a 15-3/8 point jump to 49-1/2). (NEW LINE) (NEW LINE)"THE TAN SHEET" INDEX OF OTC DRUG CHAIN & WHOLESALER STOCKS: THIRD QUARTER PERFORMANCE (FOOTNOTE) * Traded on AMEX. ** Traded on NASDAQ. n1 2-for-I stock split.(END FOOT) Although FDA proposed new, more stringent regulations for dietary supplements in June and Congress is currently debating legislation on how best to regulate supplements, the vicissitudes of the debate in Washington have not shaken Wall Street's enchantment with the industry. The one apparent exception is Herbalife, which fell 3/4 to 13-3/4 in the three month period ended Sept. 30 due, in part, to investor concerns about the effect FDA's proposed regs would have on the firm's Thermojetics herbal tablet-based weight control system. Besides the 1993 price gains, Wall Street's high regard for dietary supplement companies is reflected in the marketplace for new stock offerings. So far in 1993, GNC and Rexall Sundown raised nearly $ 114 mil. from initial IPOs; GNC raised another $ 87 mil. from a secondary offering in July; Herbalife and shareholders are in the midst of a 5.4 mil. share offering at $ 12.50 a share, which seeks to raise $ 67.5 mil.; and Nature's Bounty former Chairman and founder Arthur Rudolph, who has retired, liquidated most of his stake in the company -- 2.35 mil. shares -- for approximately $ 33.5 mil. Rexall Sundown, since going public on June 18 at $ 14 a share, has doubled its market value. To help continue the upward momentum, the company on Oct. 5 declared a two-for-one stock split effective Oct. 28 to shareholders of record on Oct. 18. Fort Lauderdale, Fla.-based Rexall Sundown, which historically has relied on contract manufacturing for the products it markets, is taking steps to develop its own manufacturing capability for both vitamins and OTC medications. In its EPO prospectus, Rexall reported that it planned to put over $ 7 mil. of its stock proceeds, which amounted to $ 32.9 mil., toward the construction of a vitamin manufacturing plant at a site in Boca Raton, Fla. ("The Tan Sheet" May 3, p. 4). In addition, Rexall announced in August its intention to acquire a pharmaceutical manufacturing plant in Verona, Penn. for $ 3 mil. from generic drug manufacturer Pennex Products, which is in Chapter 11. The acquisition was completed on Sept. 30 ("The Tan Sheet" Oct. 4, In Brief). Most of the Rexall's stock price run-up occurred in August and September after several stock analysts initiated coverage in the second half of July. On July 15, Raymond James & Associates analyst Donald Hultgren began coverage with a buy rating and on July 30 Kemper Securities analyst Ken Silverman initiated coverage of the stock with a strong buy rating. Raymond James and Kemper were the lead underwriters of the IPO. In a July 15 report, Hultgren emphasized Rexall Sundown's distribution capabilities and earnings growth performance in concluding that the stock was undervalued relative to other publicly traded dietary supplement firms. Rexall sells separate vitamin brands to drug and supermarket chains and to health food stores; markets a line of OTCs and vitamins to independent drugstores; sells mail order vitamins and supplements via a catalog business; and has a direct marketing organization. Although Rexall was hurt somewhat by Phar-Mor's Chapter 11 situation in fiscal 1992, the company reported that continued declines in sales to the troubled deep-discount chain "have been more than offset by increased sales to existing customers as well as sales to new accounts." Through the nine months (ended May 31), Rexall announced that fiscal 1993 sales were up 24% to $ 67 mil. while pro forma net income grew 83% to $ 4.3 mil. Hultgren calculated in July that the stock's going price of $ 16 a share was "clearly undervalued [and] would appear to have appreciation potential of almost 40% to reach parity with other companies in the industry." Kemper downgraded the stock to a "long-term buy" on Aug. 18, when the stock was trading near $ 23 a share. GNC's story on Wall Street in 1993 is similar to Rexall's. GNC, which manufactures and retails vitamins and supplements, is selling at more than triple the January IPO price of $ 16 a share. The stock has been listed in First Call's "Most Attractive Issues" ranking for the past eight weeks. In initiating coverage of GNC in August, PaineWebber analyst Gary Giblen characterized the firm as a "category killer" based on its dominance of the retail market for vitamin and sports nutrition products. "The only national chain of its type, GNC has nine times as many locations and six times the sales of the #2 vitamin retailer," Giblen noted. "Unusual for a retailer, GNC has a dominant near #1 brand position (10% market share) in the fragmented vitamin supplement market as well as the largest advertising budget in the industry including manufacturers, 5% of sales versus the 1.3% industry average." Forecasting 3-7% annual growth for the vitamin industry in upcoming years, Giblen predicted that GNC "will grow at a faster rate by wresting share away from independent health retailers." In his most recent report reiterating an "attractive" rating, Giblen set a 12 month price target for GNC stock "in the mid-50s." Following a two-for-one split on Oct. 6, the stock topped 25. Investor concern about the potential impact of the Clinton Administration's health care reform proposal continues to weigh down the large cap pharmaceutical stocks, which resulted in a 5.4% decline in the manufacturers component of "The Tan Sheet" Index. American Home Products, Bristol-Myers Squibb, Johnson & Johnson, Rhone-Poulenc Rorer, Schering-Plough, SmithKline Beecham and Warner-Lambert all edged downward between 2%-8% during the quarter. SmithKline Beecham, which slipped 2-1/4 to 26-5/8, returned to the drawing board after FDA's Gastrointestinal Drugs and Nonprescription Drugs Advisory Committees unanimously concluded at a joint Sept. 9 meeting that the company's database for OTC cimetidine failed to support the drug's efficacy in treating heartburn ("The Tan Sheet" Sept. 13, pp. 1-6). The Street's perception of the current economic and political climate continues to bode well for private label and generic manufacturers, as reflected in the third quarter performances of Perrigo and Roberts Pharmaceutical. Roberts, despite its branded OTC and Rx product line, has been linked in the business press to the revived generic drug industry, which is viewed on the Street as a likely winner from health care reform. The larger health care debate aside, Roberts (up 36.6% during the quarter on an 8-1/2 point gain to 31-3/4) continues to aggressively expand by acquiring cast-off brands from the large, research-intensive drug companies. Flat during the first half of the year, Perrigo (up 41.7% on a 9-1/8 point gain to 31) is the leader in the OTC segment at a time when "private label" is becoming a buzz word for consumers, retailers and investors. An eye-opener for investors was the company's fiscal 1993 results, which included a 39% jump in sales to $ 570.1 mil. and a 56% increase in net income to $ 44. 6 mil. Perrigo stock lurched ahead after a two-for-one split in July but lost some steam toward the end of September when Oppenheimer analyst Gabriel Lowy downgraded the stock to "market performer" from "buy" on Sept. 24 based on the stock's soaring valuation. Lowy estimated that Perrigo, which was trading near 34, was priced at nearly .42 times calendar year 1994 net earnings. The stock, however, bounced back after losing 4-1/2 points that day to close the quarter at 31. Chart omitted.

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