Viratek's Virazole (ribavirin) is a vivid example of the infectious disease wonder drug circa 1986: a product with a current sales base of $10-$15 mil. and the ability to stimulate stock market investment of over $500 mil. Since the initial U.S. approval for Virazole on Jan. 2, 1986, the market valuation for Viratek has increased from $74 mil. to $440 mil. on Dec. 31, 1986. The drug was approved by FDA initially for respiratory syncytial virus; the product's potential, however, is based on the company's interest in a wide range of studies for other infectious diseases, including adult influenza and AIDS related complex. In 1986, Viratek, a one-product firm affiliated with ICN Pharmaceuticals, was the financial community's pure play in the AIDS R&D race. The 493% net appreciation in Virateak's stock price over the year was by far the largest percentage gain by the 44 stocks tracked in the "F-D-C" Monthly Index of O-T-C issues. Two other issues recorded gains that better than doubled their stock prices in 1986: Genentech (up a net 50-1/8 points to close at 85, after a two-for-one split) and K-V (up 6-1/4 points to 12). Market Interest In Ribavirin Still Strong Despite Late Summer Success With Competitor Drug AZT The investment fervor for Viratek and ribavirin, in essence, indicates the financial community's confidence in the accelerated effort against infectious diseases. While the lay press carries more copy about the spread of AIDS, the financial markets appear to be convinced of the positive effects of increased public funding and attention to viral diseases. Viratek rode the first wave of that confidence based on two events: (a) the FDA approval of the aerosolized dosage for the RSV indication; (b) Kodak's investment of $6 mil. for AIDS clinicals. The Kodak investment in AIDS work directly supplements a large $45 mil. joint-venture agreement with ICN. A ribavirin multi-center 379-patient study on AIDS related complex is due to be completed by the end of January. Exemplifying the ribavirin fever, in mid-August, Paine Webber analyst Ron Nordmann calculated that if 2 million patients took Virazole orally for AIDS, the drug could reach the $2 bil. per year sales level from domestic U.S. use -- a level more than three times as great as the current top volume leader Tagamet. The market's ardor with ribavirin weathered the late summer reports of initial success for a competing AIDS research compound, Burroughs Wellcome's AZT. Viratek stock held strong through October and November pushing the company's total valuation as high as $550 mil. during that period. In mid-October, Goldman Sachs analysts were more cautious about ribavirin's AIDS potential than Nordmann. The Goldman Sachs analysts still noted the possibility for further indications for ribavirin pointing out that the drug "has shown to be very effective in treating Lassa fever." Viratek's stock, however, did soften considerably in the final month of the year to close at 63, down 15 points from its closing at the end of November. The test protocols for the B-W compound are reportedly being broadened to allow more AIDS patients to enter trials. As many as 3,000 patients may already be receiving AZT in trials. Among the other companies listed on the "F-D-C" Monthly Index of O-T-C stocks, at least three are involved in some type of AIDS research. The Street treated two well, Chiron (up 8-1/8 to 20-7/8) and Centocor (up 6-3/4 to 28-1/2), but cooled to the third, Newport (off 8-7/8 to 4-1/4). Newport's NDA for isoprinosine as an AIDS treatment, filed at the end of 1985, was rejected by FDA. Centocor has AIDS diagnostics products either on or near the market, while Chiron is in the early developmental stages of a recombinant AIDS vaccine. Chiron will begin receiving product royalties from one of its infectious disease projects when Merck launches Recombivax HB, a recombinant hepatitis B vaccine for which Chiron provided early development work. Like Viratek, Chiron also had the investment support of a major partner in 1986 -- support that brings money and credence to long R&D development projects. Chiron announced an investment by Ciba-Geigy in early October to fund a vaccine joint venture. Chiron described the investment as "one of the largest financial commitments made by a major pharmaceutical company to a small company to develop a program." Chiron also confirmed a relationship with Johnson & Johnson in November, the firm disclosed in a recent 13D filing with the Securities & Exchange Commission. The deal, which gives Chiron $12 mil. in exchange for 6.25% (718,391 shares) of its common stock, covers development of Chiron's wound healing agent, epidermal growth factor, as well as diagnostic product development in the infectious disease area. Genentech's 260-Plus P/E Ratio Indicates High Expectations For Activase (TPA) Mirroring the high prices paid by Lilly and Bristol-Myers in 1985 for full purchases of Hybritech and Genetic Systems, minority investments in R&D companies continued to be made at high valuations in 1986. For example, in July, Integrated Genetics (up 3-7/8 to 9-1/8) announced a joint venture with Amoco which valued 25% of Integrated's resource base at $100 mil., an amount exceeding the company's total market valuation at the time. Genentech retained and strengthened its position as the biotech industry's solid performer in 1986. On top of a doubling of market valuation in 1985, the company tripled its valuation in 1986, finishing with a total valuation of $2.8 bil. -- which is roughly the same year-end valuation for Marion Labs. Genentech is riding the success of its own self-marketed product, Protropin and the filing of an NDA for Activase (TPA). The development of Protropin into a $50 mil. per year drug has moved Genentech out of the image of an early-stage development firm and into the position of the first new biotech business to enter the therapeutic segment with a finished product of its own. Following on the heels of the growth hormone, the TPA development project has the market's full attention. The stock is carrying a P/E ratio of 260-plus in expectation of a major product introduction in the lucrative cardiovascular market. Genentech management has described an indication profile for TPA which could put the total number of patients at over 1 million. The per treatment cost for the product has been estimated between $1,000 and $3,000 ("The Pink Sheet" Oct. 20, p. 11). An Activase NDA for heart attacks was submitted in April; FDA has not yet taken the drug to its Cardio-Renal Advisory Committee. Genentech's earnings potential from TPA is drawing such favorable reviews that the company's decision to spend $400 mil. to buyout two R&D partnerships was greeted by a positive market reaction and drew some efforts to prevent the buyout by limited partners. The buyouts were approved on Dec. 30 giving Genentech product rights and all profits from future sales of Activase, Protropin and gamma interferon. Three of the market's biotech casualties in 1986 were top performers from the year before: Cetus (off 7-7/8 to 18-5/8), Biogen (off 7-1/2 to 7-1/8) and Immunex (off 2-1/8 to 11-3/4). Cetus was at the head of the class in 1985 with a stock appreciation of over 200%, but the interleukin-2 momentum which drove the 1985 gains faded in the second half of 1986. The issue moved above the $40 a share mark during the summer, before beginning a retreat of more than 20 points. Biogen Has $75 Mil. To Fund Development For Immuneron (Gamma Interferon, Recombinant) Expectations for the company's interleukin-2 product, Proleukin, were dimmed from the cancer cure publicity of November 1985. Cetus continues to supply IL-2 free of charge to National Cancer Institute investigators. Immunex also experienced the flip-side of market attention to interleukin-2 with its decline in 1986; the firm is developing an interleukin-2 product under an agreement with Roche. Cetus stock may also have been adversely affected by the market's wait for the launch of its generic cancer therapeutics business, Cetus Ben Venue Labs. Established in 1985, the joint venture recently received its first ANDA approval. In addition, the Cetus decision to set up a separate European operation last fall, Euro-Cetus, through a $75 mil. R&D partnership did nothing to abate the second-half stock decline. The costs of establishing the overseas venture contributed to a prediction of at least six months of below breakeven operations in the second half of calendar 1986 and near breakeven for the January to June 1987 period. For Biogen, the company's European moves in 1986 represented a bright spot during a down year. First of all, the company successfully went to the overseas financial markets to raise over $35 mil. during the summer. Europe could be a further source of funds for Biogen if the company is successful in its reported attempts to divest its Swiss operations. One financial analyst, Robertson, Colsman & Stephens' Kathy Behrens considers a sale or closure of Biogen's Geneva operation not only likely, but essential if the company is to continue to fund development efforts in the absence of a major source of revenues. Despite the market's downward pressure on Biogen stock in 1986, the year was a watershed for the company. Its alpha interferon development project was approved by FDA for hairy cell leukemia and is being marketed by Schering-Plough under the brandname Intron A. Schering has estimated first year Intron sales at $10 mil. The company also bought back the initial investment positions of Schering-Plough and Monsanto giving the firm more autonomy for the future. The firm subsequently signed a marketing agreement with Baxter Travenol for gamma interferon. The Baxter agreement does not have the close equity tie-ins of the previous agreements. The company has over $75 mil. in cash to get through the development cycle for its first target product, Immuneron (gamma interferon) for treatment of rheumatoid arthritis. The firm expects approval for that indication in West Germany in the first half of 1987. Amgen bounced back from the September market decline to finish the year at 22-1/8 up 64% from the 1985 close. With a secondary offering at mid-year, the company's total market valuation increased almost 200% from $147 mil. in 1985 to $293 mil. on Dec. 31, 1986. The key to Amgen's success in the short-term is the progress of the anemia product, erythropoietin. Amgen convinced J&L that the product was made more efficiently through biotech technology than purified in outer space; and J&J is marketing partner for the U.S. The company has reserved a niche of the market (dialysis patients) to build its own marketing experience. California Biotechnology got commitments from two top partners, American Home Products and Lilly, for nasal delivery work in 1986. The company's stock, however, declined through the final quarter to close at 12-1/4, below the 12-3/4 price at the end of 1985. The stock peaked at 29-3/4 during 1986. The 20-issue Pharmaceutical Component of the O-T-C Index was the strongest of the four segments for the second year in a row. Twelve of the stocks were up for the year; and the component average advanced 47%. Paced by the drug stocks, the Index Composite moved up 30%, again about half of the 1985 advance, ahead of the Dow's 27% climb, but lagging the S&P 400, which advanced 35%. Market interest was by no means limited to the bioech side of the industry. In the OTC drug area, for example, solid performances were turned in by Chattem (up 2-1/4 to 22-3/4) and Block Drug (up 6-1/2 to 27-1/4). Block's market performance outpaced its operating results in 1986. The six-plus net stock gain represented a 31% stock appreciation compared with steady 11% after-tax earnings gains during recent quarters. The stock's appreciation may include a ripple effect from the large takeover attempts in the consumer products business, such as Unilever's purchase of Chese-Pond's. With a total market valuation of $425 mil. (for Class A and Class B shares combined) and a relatively small float, Block could be viewed as a potentially affordable route to the OTC business. The Block family controls 50% of the voting (Class B shares). An OTC marketer in search of new ownership, Jeffrey Martin, consummated a deal at the wire in 1986. The cosmetics/hair care company Dep announced the acquisition of Jeffrey Martin for $7.30 per share. Jeffrey Martin had been looking for a new parent as the market for its leading market, Topol toothpaste, weakened. The price for Jeffrey Martin is about half of the per share cost when the company went public in 1983. However, it represents a premium over recent trading levels. Chattem's 2-1/4 gain came in the face of sliding earnings results. The company has been paring away businesses (Love cosmetics to MEM in March of 1986) while continuing to build its niche marketing in the consumer products field. In 1986, for example, it added the Ultra-Swim line in 1986. Packaging for the consumer and Rx businesses remained a steady growth area for Paco Pharmaceutical. The stock got a burst of market interest during the early spring with the second round of tampering incidents, climbing as high as 23-3/4. The stock dipped back to the 15 range at the end of September but finished the year strongly, gaining 2-3/4 points in December to a close of 21. Paco produced a 19.5% after-tax earnings gain (to $4.4 mil.) on an 8% sales gain in the Aug. 31 year. It showed a profit margin of over 10% net earnings to sales for the fiscal year. In the generic drug segment, the financial community is turning its affection to the hospital drug business after several years of infatuation with the retail business. A perception of overall positive trends in the hospital drug business for generics helped to fuel LyphoMed's continued growth (up 6-3/8 to 18-3/8). The 50% stock appreciation comes on top of a 95% gain the year before. LyphoMed was successful a number of times in securing first generic approvals, including approvals for cepahazolin (Keflin and Ancef), cephapirin (Cefadyl), droperidol (Inapsine) and dacarbazine (DTIC-Dome). The market's interest in the hospital generic sector was expressed in two ways in relation to Par Pharmaceuticals. The tendency of analysts to look ahead to a dry-spell for new generics is indicated by a 1-1/4 slip by Par's stock for the year. Despite a very strong operating year in the 12 months ended Sept. 30, the stock did not keep pace. Par, however, is also looking to broaden its base from retail Rxs. The firm established Quad Pharmaceuticals with assets purchased from the Chapter 11 reorganization of BetaMed. Nova Pharmaceuticals (up 3-1/4 to 10-1/8) was the star performer among the specialty R&D boutiques. The Baltimore-based receptor technology company entered into a licensing agreement with Pharmatec, which could put four drugs into clinical trials in 1987. Wall Street also responded to the company's hiring of former Merck Chairman John Huck as its top exec. One of the weakest performers in 1984, K-V (up 6-1/4 to 12), St. Louis-based controlled release development firm, has put two years of good gains back-to-back. Since 1985, K-V has been participating in the the strong Actifed business through royalties for the development and production of the controlled release form of the drug. The company had previously been paid exclusively as a contract manufacturer. The company said in November that it had a dozen royalty-type agreements. K-V has also reported that it plans to begin a self-marketing effort in 1987. Market research firm IMS (up 8-3/8 to 24) is on an upward swing as an information supplier to the pharmaceutical industry. The investment community liked the company's two 1986 acquisitions, Fisher-Stevens and Clark-O'Neill, both of which could help the company further penetrate the sales force monitoring market in 1987. At one point, IMS stock carried the Value Line investment survey's highest for timeliness. Leading the five-issue Wholesaler Component to a double-digit percentage point gain for the year were Bindley Western (up 2-7/8 to 12-3/8), despite the fall-out of diversion investigations and Moore Medical (up 3-5/8 to 25-3/4). Among the Chain stocks, Begley (up 3/4 to 17), Drug Systems (up 3/8 to 5) and Medicine Shoppe (up 5-5/8 to 29-5/8) advanced for the year, but a decline in the price of Big B (off 3-7/8 to 11-5/8) left the Chain Component flat for the year. EDITORS' NOTE: For a quick summary of the performance of all 44 issues in the "F-D-C" Index, see page 18. Charts omitted.
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