DRIP PORTFOLIO

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In Drugs We Trust
J&J's Drugs, Present and Future

by Brian Graney (TMFPanic@aol.com)

ALEXANDRIA, VA (July 21, 1999) -- Corrupting a 1950s pop hit from Danny and the Juniors, "We don't care what people say, drugs and pills are here to stay." And as the nation's population ages and technology advances, we're convinced the impact that drugs will have on the everyday lives of Americans will only become more pronounced.

Over the past six years, the Food and Drug Administration's Center for Drug Evaluation and Research has approved more than 550 brand-new drugs treating a wide range of illnesses and conditions. Those new drugs have been approved more quickly and at a higher rate than ever before. In 1993, only about 30% of the new drug applications (NDAs) submitted to the FDA were approved. Over the past three years, that number has jumped to about 50%. Meanwhile, the agency's median total approval time has been cut in half to 12 months in 1998 from 24 months in 1993. Based on those factors, the outlook for the drug business has perhaps never looked brighter.

For investors, the increasingly important role that drugs are playing and will continue to play in the lives of large numbers of Americans represents a fertile opportunity. From our point of view, there are few business areas offering more promise for high returns on investment in the years to come than pharmaceuticals. It's a fair bet that at some point in your life, drugs will play a crucial role in either improving or prolonging the life of at least one close friend or loved one, or quite possibly even yourself. Few products offer so much promise for bettering the general human condition. Few products offer so much hope to so many.

At our healthcare holding, Johnson & Johnson (NYSE: JNJ), the drug business is the engine that is driving this $133 billion freight train of a company forward. As we discussed yesterday, J&J's worldwide drug sales in the second quarter rose 25.4% year-over-year and 8% sequentially to $2.7 billion. In the U.S. alone, drug sales jumped 37.3% from the year before. Growing a company that reports quarterly sales and earnings data in the billions of dollars is a considerable challenge for any business manager, but the folks at J&J are proving that they are up to the task. And in a conference call yesterday, those managers underscored the important role that drugs will play in the future growth of the company.

Some 80% of the recent growth of J&J's pharmaceutical business is tied to nine products: Duragesic (chronic pain), Levaquin (bacterial respiratory infections), oral contraceptives such as Ortho Tri-Cyclen, Procrit (anemia), Propulsid (gastrointestinal disorders), Risperdal (schizophrenia), Sporanox (fungal infections), Topamax (epilepsy), and Ultram (pain management). Dozens of other drugs are marketed by J&J, but these select few are leading the firm's pharmaceutical charge.

To add some perspective on these growth drivers, J&J singled out the fast-selling Risperdal, which is the top-selling anti-psychotic medication with a 26% share of its $2.4 billion market. Another star performer is Procrit, whose Q2 sales were up a tremendous 90% year-over-year and roughly 30% sequentially, with an estimated 85% of its potential treatment market still untapped. And prescriptions of Levaquin, which competes in an $8 billion market, rose 90% between May of 1999 and May of 1998, according to the company.

Extending those types of market share gains and growth rates is a primary goal of the company right now. To do that, J&J has boosted its drug sales force 66% in the past two years to 5,000 strong. That bigger presence, coupled with healthy demand from consumers, has helped drive market share gains for the company's major products, which in turn has driven the volume growth and revenue gains that we are seeing.

In the pipeline, the company is working on lower dosage versions of Risperdal and a topical gel called Regranex for treating diabetic foot ulcers. Later this year, J&J is planning to file documents with the FDA for approval of an Ultram/Tylenol combination painkiller and its Reminyl Alzheimer's drug. An NDA for Evra, a half-dollar-size transdermal contraceptive patch, is expected to be filed in the first quarter of next year. While none of these products should be considered potential blockbusters (although Evra has a shot if it gains wide acceptance), these new drugs should help keep the drug revenue growth story going.

Perhaps the biggest boost to J&J's pipeline came this morning, however, when the company confirmed it will acquire biotechnology company Centocor (Nasdaq: CNTO), maker of the Remicade Crohn's disease treatment and the ReoPro anti-blood-clotting drug, for $4.9 billion in stock. The effects of this acquisition, which was widely expected, will most likely be felt further down the road. In particular, Centocor will give J&J's future pipeline a decidedly different flavor, thanks to the firm's research in high-growth areas such as cancer, autoimmune disease, and cardiology.

We're still analyzing the impact that the Centocor acquisition will have on good old J&J. But given the growth we expect to see in the drug industry over the years to come, we couldn't be happier with J&J's determination to ride the drug boom for all it's worth. That trait, combined with the company's commitment to returning the fruit of its labors to its shareholders, makes us very comfortable long-term J&J investors.

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7/21/99 Close

Stock   Close   Change
JNJ      97 7/16  +1
INTC     65 9/16  +5/8
CPB      44 1/16  +3/8
MEL      34 7/16  -7/16
              Day     Month    Year    History
Drip        0.45%     1.72%    5.64%    20.15% 
S&P 500     0.16%     0.48%   12.79%    46.82% 
Nasdaq      1.08%     2.83%   25.95%    73.28% 


Last Rec'd  Total#  Security In At   Current
 05/03/99    8.134    CPB   $52.793  $44.063
 07/01/99   21.066    INTC  $41.861  $65.563
 03/09/99    9.076    JNJ   $74.910  $97.438
 06/07/99   22.453    MEL   $33.488  $34.438


Last Rec'd Total# Security  In At     Value    Change
 05/03/99   8.134   CPB    $429.42   $358.41  ($71.01)
 07/01/99  21.066   INTC   $881.84  $1381.14  $499.30 
 03/09/99   9.076   JNJ    $679.89   $884.35  $204.46 
 06/07/99  22.453   MEL    $751.91   $773.25   $21.34 


Base:  $2800.00
Cash:    $24.29**
Total: $3421.44

The Drip Portfolio has been divided into 110.619 shares with an average purchase price of $24.408 per share.

The portfolio began with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to have $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging, we don't expect to seriously challenge the S&P 500 for the first 3 to 5 years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. (NOTE: our investment in Campbell Soup is all but frozen due to fees instituted in its DRP plan.)

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