Monday, May 17, 1999
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Business jet aircraft manufacturer Gulfstream Aerospace (NYSE: GAC) stormed ahead $6 1/16 to $61 11/16 on news it will be acquired by military tank and sub builder General Dynamics (NYSE: GD) for $5.3 billion in stock, or $71.44 per share. General Dynamics, fresh off its failed $1.35 billion acquisition attempt of shipbuilder Newport News (NYSE: NNS) last month, sank $6 3/16 to $65 1/4 on fears that it is getting into unfamiliar business territory, even though Gulfstream's management will stay on board after the merger, and investor Ted Forstmann has agreed to stick around as chairman. While a link-up with Newport News would have yielded benefits from economies of scale and cost-cutting, acquiring the more profitable Gulfstream will provide a quick boost to General Dynamics' earnings and cash flow. With fiscal 1998 operating margins of 15% and a return on average assets of 15% (compared to Newport News' 9.4% operating margins and a 4.2% return on average assets), Gulfstream is expected to add $0.25 to General Dynamics' earnings per share in fiscal 1999 and $0.35 in 2000.

Automated physician practice management systems developer Medical Manager Corp. (Nasdaq: MMGR) jumped $14 to $47 3/4 after agreeing to be acquired by healthcare e-commerce services and filtration systems firm Synetic (Nasdaq: SNTC) in a stock swap valued at $1.4 billion. Synetic fell $4 1/2 to $91 as the purchase price works out to a hefty 77% premium to Medical Manager's closing price of $33 3/4 per share on Friday. Waiting in the wings to potentially challenge the combined Synetic-Medical Manager in the race to become the dominant healthcare information provider on the Web is Healtheon (Nasdaq: HLTH), which was down $1/8 to $56 7/8 today on a report in The Wall Street Journal that it is in merger talks with privately held WebMD. The cyber-hubbub lifted the shares of IDX Systems Corp. (Nasdaq: IDXC), the often-proclaimed "first mover" in the Internet-based healthcare information systems field, which traded up $4 9/16 to $21 15/16.

QUICK TAKES: PC and computing products maker Hewlett-Packard (NYSE: HWP) climbed $4 9/16 to $88 3/4 ahead of its fiscal Q2 earnings report. After the bell, H-P reported EPS of $0.88 compared to $0.65 a year ago, topping the First Call mean estimate by $0.08... Telecommunications networking equipment maker Ciena Corp. (Nasdaq: CIEN) rose $2 5/16 to $26 9/16 after BellSouth (NYSE: BLS) said it has already deployed Ciena's MultiWave Sentry dense wavelength division multiplexing (DWDM) system to support its long-haul network in five southeastern states and plans to deploy more Ciena systems later this year.

Multimedia educational products company Harcourt General (NYSE: H) advanced $4 3/8 to $54 after saying it will spin off most of its 54% stake in high-end retailer Neiman Marcus Group (NYSE: NMG) to shareholders sometime this fall. BT Alex. Brown raised its rating on Harcourt to "buy" from "market perform" on the news... Digital signal processing cores manufacturer DSP Group (Nasdaq: DSPG) gained $2 3/8 to $25 5/8 after Goldman Sachs started coverage of the firm with a "recommend list" rating... Aerospace and industrial forgings and castings maker Wyman-Gordon Co. (NYSE: WYG) moved up $5 11/16 to $18 15/16 after agreeing to be acquired by jet engine and industrial gas turbine castings maker Precision Castparts (NYSE: PCP) for $20 per share in cash, or $825 million including assumed debt.

Competitive local exchange carrier (CLEC) Intermedia Communications (Nasdaq: ICIX) picked up $3 3/16 to $30 15/16 after Merrill Lynch raised its near-term rating on the firm to "accumulate" from "neutral" and its long-term rating to "buy" from "attractive." Fellow CLEC ICG Communications (Nasdaq: ICGX), which received identical upgrades from the brokerage, rose $1 9/16 to $22 1/16... Furniture rental company CORT Business Services (NYSE: CBZ) tacked on $1 1/4 to $24 3/8 after privately held Brook Furniture Rental Inc. announced a $28 per share cash offer for the firm, which is higher than the $24 per share in cash and $2.50 per share in preferred stock management-led buyout offer accepted by the company in March. In a federal filing, CORT said it has rejected Brook's bid after its major shareholders stated their opposition.

Automotive precision fuel systems maker Walbro Corp. (Nasdaq: WALB) added $3 7/32 to $19 3/16 after Britain's TI Group PLC, undeterred by Walbro's downward revision of its Q1 earnings on Friday, reaffirmed its $20 per share buyout offer for the firm... Ambulance and school bus maker Collins Industries (Nasdaq: COLL) rolled $1 higher to $5 3/4 after reporting fiscal Q2 EPS of $0.20, up from $0.14 a year ago... Life insurance holding company Life USA Holding (Nasdaq: LUSA) gained $9 1/8 to $19 3/8 after agreeing to be acquired by life and health insurer Allianz Life Insurance Co., a subsidiary of Germany's Allianz A.G., for $20.75 per share in cash, or $540 million... Agricultural machinery maker Case Corp. (NYSE: CSE) harvested a $3 11/16 gain to $48 1/2 after agreeing to merge with fellow farm equipment company New Holland N.V. (NYSE: NH) in a $4.3 billion cash deal valuing Case at $55 per share. New Holland dropped $1 3/16 to $16 3/8.


It wasn't a happy Monday for biotech investors, who had pills, thrills, and bellyaches on their minds as shares of drug developer Immune Response Corp. (Nasdaq: IMNR) led the sector sharply down. Immune Response was crushed for a loss of $4 1/4, or 36%, to $7 9/16 after an independent panel recommended stopping Phase III trials of its Remune anti-HIV treatment. Immune Response and its partner Agouron Pharmaceuticals (Nasdaq: AGPH) will commence two new trials of Remune in hopes of earning FDA approval for the treatment, but interim data suggested that the drug, when used as part of a treatment "cocktail," wasn't adding much to the equation. Meanwhile, cancer and AIDS drug developer U.S. Bioscience Inc. (AMEX: UBS) lost $2 9/16 to $9 7/16; it drew a fine line in describing the development of its NeuTrexin colorectal cancer treatment, which is showing "a trend towards a clinically meaningful increase" in patient survival but still falling short of statistical significance. Several other biotechs, including Organogenesis (AMEX: ORG) and Amgen (Nasdaq: AMGN), posted modest losses today.

Telecom and cable operator US WEST (NYSE: USW) was the latest company to find itself in the crosshairs of Global Crossing (Nasdaq: GBLX), today agreeing to merge with the international telecommunications carrier in a complex deal that will create a new entity with a market capitalization of more than $75 billion. With Rochester, New York-based local and long-distance phone company Frontier Corp. (NYSE: FRO) signing on with Global Crossing in mid-March, the telecommunications Ghidra had combined 1998 sales in excess of $15 billion; earnings before interest, taxes, depreciation, and amortization (EBITDA) of more than $6.2 billion; and over 63,000 employees. The new company, to be called Global Crossing, will be half-owned by Global Crossing/Frontier shareholders and half-owned by US WEST shareholders and will boast a network linking 19 countries and 185 cities. For more on the deal, head back to this morning's Breakfast With the Fool. Shares of US WEST lost $4 to $58 1/4 today. Global Crossing moved back slightly, dropping $1 1/8 to $60 1/4, while Frontier was essentially flat.

QUICK CUTS: Warren Buffett's Berkshire Hathaway (NYSE: BRK.A) declined $2000 to $72,300 after the company reported Q1 earnings before investment gains and goodwill amortization of $405 million, or $267 per Class A share -- a 23% decline from $523 million, or $345 per share, a year ago (Motley Fool estimates of pro-forma performance). The Fool covered Berkshire's annual meeting earlier this month... Warehouse discount retailer Costco Cos. (Nasdaq: COST) shelved $2 1/8 to $79 as a story in this week's issue of Barron's suggested that shares of the company are richly valued and may have difficulty appreciating further... Generation "Y" marketer Alloy Online Inc. (Nasdaq: ALOY) was tarnished for a loss of $2 1/8 to $17 7/8 in its second day of trading. The shares closed at $20 on Friday as the company sold 3.7 million for $15 each.

Offshore drilling contractor Marine Drilling Companies (NYSE: MRL) was drilled for a loss of $2 1/4 to $12 5/8 on news of plans to offer 5 million shares of company stock to fund construction of two rigs. The new shares represent about a 9.5% increase in the current outstanding... Entertainment company Viacom (AMEX: VIA) shed $1 1/2 to $37 11/16 after agreeing to boost its cash buyout offer for the 20% of Spelling Entertainment (NYSE: SP) it doesn't own to $9 3/4 per share from $9... Media streaming technologies developer RealNetworks (Nasdaq: RNWK) lost $2 1/32 to $86 21/32 as it filed to sell 4 million shares of company stock, about a 6% boost to the total outstanding.

Generic drug maker Mylan Laboratories (NYSE: MYL) spilled $1 3/4 to $23 1/4 after reporting fiscal Q4 EPS of $0.32, better than last year's $0.26 but flat with market estimates... Video transport and network access system maker Tellabs (Nasdaq: TLAB), which split its stock 2-for-1 after the market's close today, lost $1 1/8 to $116 7/8... Ohio bank company Belmont Bancorp (Nasdaq: BLMT) gave up $1 1/4 to $10 3/4 after the company said it expects to report a Q1 net loss of approximately $2.6 million. An internal review also concluded that Belmont must restate full-year 1998 EPS to reflect a $0.37 loss.

Shares of global satellite communication company Iridium World Communications (Nasdaq: IRID) added a loss of $1 1/16 to Friday's $4 1/16 drop, ending at $9 3/8. News of trouble with the covenants of its credit facility driven by slow customer growth began the slide last week... Internet bank Net.B@nk (Nasdaq: NTBK), a recent Foolish Double, earned a "sell" rating from First Security Van Kasper, losing $1 13/16 to $57 7/8 on the news. The brokerage also stuck TeleBanc Financial Corp. (Nasdaq: TBFC) with a "sell" rating, sending the shares down $6 3/4 to $85 1/2... Chemical mechanical planarization equipment company LAM Research (Nasdaq: LRCX), which was downgraded to "outperform" from "buy" by analyst Milind Bedekar, moved back $11/16 to $30 1/8.

Automaker General Motors Corp. (NYSE: GM) slowed $2 13/16 to $80 5/16 after Morgan Stanley Dean Witter cut its rating on the stock to "neutral" from "outperform." Ford Motor Co. (NYSE: F), which received a similar downgrade from analyst Steve Girsky, slipped $3 3/16 to $57 9/16... Motion picture equipment company Matthews Studio Equipment Group (Nasdaq: MATT) lost a grip on $7/8 to $7 after turning in fiscal Q2 losses of $0.23, down from an $0.08 loss last year... Penitentiary operator Prison Realty Trust (NYSE: PZN) lost $2 1/16 to $14 15/16 after Legg Mason Wood Walker downgraded the company's stock to "market perform" from "buy."

An Investment Opinion
by Alex Schay

Of the Body, Of the Market

In late April, when asked by a Bloomberg reporter about his company's prospects for remaining independent in the foreseeable future, Tom Pigott, Chief Executive Officer of the online pharmacy Soma.com replied cryptically, "Soma.com is building for the future, and we'll see what the future holds."

CVS Corp. (NYSE: CVS), the nation's largest drugstore chain in terms of total bricks laid, clearly realizes that its business future will require an online presence. With "convenience" the raison d'etre in pharmacy circles, offering online distribution in order to round out the overall convenience package is a no brainer. While CVS has been developing its existing site to support its bricks and mortar operations, the firm announced today that it will acquire Soma.com in a $30 million all stock pooling transaction (which will not be dilutive this year). Soma.com will operate as a subsidiary of CVS.

So, why might you buy prescription drugs online? The short answer is, usually you wouldn't. If you have some malady, and it's already been diagnosed, chances are you want to go as quickly as possible to the nearest store and pick up your cure. The online medium right now is targeting customers with "chronic" conditions, as well as others who need refills on a regular basis (often these are overlapping circumstances). Still, the market has been estimated to be an $8-$12 billion opportunity. Coupled with over the counter drugs, personal care products and other drugstore staples, the market balloons to $70-$80 billion.

Soma.com opened its online doors in January -- the first online pharmacy to do so -- and since that time has reported a 25% compound weekly growth in sales for its first quarter of operation (with roughly 50% of its orders due to the online element of its business, the balance comes from phone and fax orders). In terms of "lives covered" Soma.com has built an impressive network of relationships reaching 100 million people -- or roughly 200 insurance plans through PBMs and HMOs. This of course allows customers to deliver insurance information and make the familiar co-payments, rather than pay the full retail price for drugs. Situated in the middle of the country, Soma.com claims that with a $9.95 fee, it can overnight its drugs anywhere in the country, making the value proposition a little more compelling.

CVS's alliance with Soma.com reflects its desire to be first to market (among the traditional chains) with an "integrated retail Internet offering" this summer, taking advantage of Soma.com's advanced backend (automated prescription order fulfillment). Plus, doing some back of the envelope calculations, with only 1% penetration of the refill market for Soma.com in its first year, CVS might be looking at a 9% return on investment after twelve months. The $30 million stock deal looks like a very attractive price. In the meantime, CVS will expand Soma.com's over the counter and ancillary products from its present total of 3000, to about 9,000 offerings. With CVS pouring $200 million into advertising every year, it will be quite easy for the company to direct eyeballs online if the proposition is appealing to consumers.

Do you think that convenience doesn't matter? During 1997, CVS implemented "Rapid Rx Refill," which enables customers to order prescription refills 24 hours a day using a touch-tone telephone. In just over 18 months after its debut, Rapid Rx Refill accounted for approximately 50% of refills. Ordering drugs online can be just as painless and, coupled with the opportunity to pick up some consumer staples, the lure for the online firms is obvious.

Drug retailers derive a significant amount of their pharmacy business from third-party payer programs. That is, many chain drug stores own PBMs as subsidiaries (like PCS, Inc., which is owned by Rite Aid, and PharmaCare which is owned by CVS). In fact, in 1998 about 85.4% of Rite Aid's pharmacy sales were third-party prescription revenues. The two major vehicles for prescription growth have been these plans, as well as the purchase of "prescription files" from independent pharmacies (essentially customer lists).

Although managed care providers have made the cost of prescription drugs more affordable for a greater number of people and have supported prescription drug therapy as an alternative to more expensive treatment (such as surgery), they have a tendency to demand lower and lower plan costs from PBMs -- which hurts their margins. CVS has a "minimum margin policy" with regard to this aspect of its business, and it has noted on numerous occasions that it has had to turn away third-party payers that do not meet its profitability requirements. Investors should monitor these trends -- for any acceleration in low-margin pickups can have some serious effects on operating performance.

Thus far, Soma.com has been extroverted in asserting that it can bring retail drug costs down, thanks to the online cost filter. Investors need to be aware of these relationships and the possible clashes as the merger proceeds. Overall though, the deal is a good one for CVS, making sure that the firm is not just protecting market share erosion, but actually attempting to expand its reach as well as provide a complete offering for its existing customers.


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