UPCOMING Rx-TO-OTC SWITCH REVIEWS PROVIDE NEEDED GOOD NEWS FOR DRUG STOCKS

UPCOMING Rx-TO-OTC SWITCH REVIEWS PROVIDE NEEDED GOOD NEWS FOR DRUG STOCKS in the second quarter of 1994, contributing to gains made by Johnson & Johnson (up 13,6% on a 5-1/8-point gain to 42- 7/8) and SmithKline Beecham (up 12.5% on a 3-1/8-point increase to 28-1/8). J&J/Merck's Rx-to-OTC switch NDA for Pepcid (famotidine) is scheduled to be reviewed by FDA's Nonprescription Drugs and Gastrointestinal Drugs Advisory Committees on July 29 while SmithKline Beecham's switch application for Tagamet is set to be revisited by the committees on July 27 ("The Tan Sheet" June 27, p. 1).

After two years of wandering in the wilderness of health care reform, drug stocks appear to be slowly regaining favor on the "Street" and may even be on the verge of a mini-rally. During the second quarter, the pharmaceutical component of "The Tan Sheet" Index rose 7.3%, led by the "blue-chip" pharmaceutical companies.

J&J's joint venture partner Merck, which markets prescription Pepcid, has been upbeat about the switch's chances given the committees' unanimous rejection of the Tagamet switch application last September. Speaking at a securities analysts meeting in April, Merck VP-Clinical & Regulatory Development Eve Slater, MD, predicted a "favorable" review by the panels. Merck Research Labs President Edward Scolnick, MD, suggested that J&J/Merck have "much better data" for the OTC heartburn indication than SmithKline did for Tagamet.

Despite the relatively large market potential for the H[2]-antagonist switch products in the U.S., the advisory committees' decision on Pepcid is unlikely to register as more than a blip on the screen for J&J given the company's size and diversity.

Gruntal analyst David Saks highlighted these attributes as well as the company's history of consistency in issuing an "outperform" rating on the stock May 2. Noting that J&J has "lost over $12 bil." in market value since January 1992, Saks suggested that the shares "do not...adequately reflect J&J's extraordinary defensive qualities and the positive implications of J&J's huge R&D commitment, promising new product pipeline, market leadership positions in many diverse fields worldwide in consumer, drug, surgical, diagnostics, and current substantial cost/savings reduction programs in plant and personnel."

Nevertheless, a successful Pepcid switch is likely to take some of the heat off the company's two OTC stars: Tylenol, which is facing increasing pressure, like all successful brands, from private labels as well as a new competitive threat from Procter- Syntex' naproxen switch Aleve; and Monistat 7, which also is being challenged by private labels and soon faces a challenge from Pfizer's prescription drug Difiucan.

For SmithKline Beecham, a thumbs-up review of the Tagamet (cimetidine) switch may mean more to the stock than an unfavorable decision given the "Street's" already tempered expectations from the earlier committee rejection. In addition, Wall Street concerns with the Tagamet patent expiration have been mitigated somewhat by the company's aggressive purchase of pharmacy benefit manager Diversified Pharmaceutical Services in May and SmithKline's stable of new Rx products, such as the antidepressant Paxil, the antiemetic Kytril and the antiviral Famvir, which are expected to make up for some of the lost sales to cimetidine generics.

Both Warner-Lambert (up 6.7% on a 4-1/8-point advance to 66) and Schering-Plough (up 8.6% on a 4-7/8-point gain to 61-1/4) benefited from speculation that either company could be party to another round of consolidation in the industry following Hoffmann- La Roche's merger deal with Syntex.

The latest buzzword among pharmaceutical analysts is "oligopoly" -- used to describe the industry of the future -- and both Warner-Lambert and Schering-Plough's prescription businesses are considered by many to be too small to effectively compete in a marketplace dominated by managed care. In addition, the two companies' OTC businesses are considered gems given the growing Rx-to-OTC switch trend. Recent speculation centers on a potential partnership between Schering and Lilly.

News of a delay in the review of Burroughs Wellcome's switch application for Zovirax while the company submits more data this summer did not make its way into the business press until after the quarter ended. Wellcome (up 9.1% on a 3/4-point gain to 9) and Warner-Lambert both finished with gains for the quarter despite a relatively rough public hearing for the Zovirax switch on May 19 in which several key physicians groups recommended against the switch.

At least one analyst already has discounted the potential failure of the Zovirax switch and still finds Warner-Lambert a "buy." NatWest Securities analyst Jack Lamberton upgraded his recommendation on the stock on June 3 while predicting that Zovirax may "fall out of Warner's pipeline." A key plus for the stock, Lamberton said, will be the favorable quarterly earnings comparisons as the company emerges from drug manufacturing problems that led to the 1993 consent decree with FDA.

The previously high-flying dietary supplement stocks received a drubbing with the publication of a study in the April 14 issue of The New England Journal of Medicine that undermined the growing body of scientific literature in support of supple-mentation. The clinical study of nearly 30,000 Finnish smokers found that beta carotene may increase the risk of lung cancer and that vitamin E had little or no benefit ("The Tan Sheet" April 18, pp. 1-6).

Nature's Bounty (down 61.9% on a 13-point drop to 8) and General Nutrition (down 30.3% on a 7-1/2-point decline to 17-1/4) were particularly hard hit by the Street's new-found skepticism toward vitamins. Also during the quarter, General Nutrition stock was hurt by the company's widely publicized settlement with the Federal Trade Commission for making unsubstantiated product claims ("The Tan Sheet" May 2, pp. 1-5).

Another vitamin company, Rexall Sundown (off 52.2% on an 8- 3/4-point drop to 8), has been plagued by lower-than-expected earnings as a result of continued net losses from the company's Pennex drag manufacturing division.