Thursday, September 17, 1998
DJIA 7867.34 -222.44 (-2.75%) S&P 500 1017.00 -28.48 (-2.72%) Nasdaq 1645.39 -44.52 (-2.63%) Value Line ndx 783.60 -17.80 (-2.22%) 30-Year Bond 104 30/32 +24/32 5.17% Yield

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by Louis Corrigan

FDA Panel Approves Immunex's Arthritis Drug

Immunex (Nasdaq: IMNX) got some pain relief yesterday when a Food and Drug Administration (FDA) advisory panel unanimously recommended that Enbrel, a treatment for rheumatoid arthritis (RA), be approved for use by advanced patients who have failed other remedies. However, the panel determined there was not enough data yet to recommend use of Enbrel by all RA patients, though doctors could legally prescribe the drug for such patients once it's on the market. Though the stock reportedly skipped up to $63 a share in off-market trading, it dipped to $55 in early Nasdaq trading before stabilizing around $58 11/16, just $9/16 above where it closed on Tuesday. (Trading was suspended Wednesday during the panel's meeting.)

Since at least limited approval had been expected, the mild reaction was a tonic to those worrying that investors who bought the rumor might sell on the news. That's especially true given that the stock had stunk up the joint over the past month and had suffered through an unusual "sell" recommendation in early August from NationsBanc Montgomery analyst Scott Sacane, who found the risk/reward unappealing given numerous obstacles facing the company. Although Immunex has seven drugs on the market, including anti-cancer agents Novantrone, Leukine, and Thioplex, the company has remained in the red despite $150 million in FY97 revenues and a current market cap of $2.5 billion. Much was riding on Enbrel, which is considered a potential blockbuster.

While Wall Street's numbers vary widely, sales of $125 million to $219 million are expected in 1999 with peak sales of $600 million or more by 2001. Bulls put annual earnings at perhaps $4.10 a share by 2001. Sacane and some short-sellers argue, however, that the drug's gross margins could be as low as 16% to 18% due to the large dose required and royalty payments to third parties. They also worry that reimbursement may be a problem given that annual treatment could run above $8,000. Also, patients may ultimately opt for alternative treatments since Enbrel must be injected.

Rheumatoid arthritis afflicts about two million Americans, mostly women ages 25 to 50. Unlike more common age-related arthritis, RA is a disorder of the immune system caused in part by excess production of tumor necrosis factor (TNF), which can cause inflammation of the joints. Enbrel works like a cell receptor for TNF, fighting this crippling disease by hooking up and thus nullifying the TNF, which would otherwise attack healthy cells. Enbrel differs from the current standard therapy methotrexate as well as Hoechst AG's (NYSE: HOE) similar drug Arava, which was approved last week by the FDA, in that these drugs block replication of the immune cells that actually cause the inflammation. In Immunex's study of 234 patients with advanced disease, 60% of patients improved significantly during a six-month trial versus just 10% of those taking the placebo. In a smaller study of 89 patients taking both Enbrel and methotrexate, 71% showed meaningful improvement versus just 27% on methotrexate alone.

Enbrel's approval recommendation didn't do much for Immunex's majority owner and marketing partner American Home Products (NYSE: AHP), which lost $1 3/16 to $54 7/16 this morning, but it did boost shares of Centocor (Nasdaq: CNTO) $1 5/8 to $36 1/8. By year-end, Centocor is expected to seek FDA clearance for Remicade, a drug already approved for treatment of Crohn's disease but which has also proved useful as a rheumatoid arthritis therapy. At the same time, though, skeptics speculate that new smart aspirin Cox II inhibitors from the likes of Merck (NYSE: MRK) and Monsanto (NYSE: MTC) could eventually steal business from these RA drugs. Though Immunex has been a homerun for early investors, latecomers are still ailing.


Intercontinental business jet aircraft maker Gulfstream Aerospace Corp. (NYSE: GAC) took off, rising $3 1/2 to $35 7/16 after saying late yesterday that it expects Q3 EPS of at least $0.80, ahead of the current mean estimate of $0.77, due to continuing strength in its business across the board. The company also projects full-year 1998 EPS of $2.95, above analysts' expectations of $2.87, as well as 1999 EPS of $3.75, topping estimates of $3.47. Gulfstream has signed orders for 52 aircraft through September 15, up 58% from 33 orders last year through September 30, and expects record orders for the year.

Semiconductor maker Advanced Micro Devices (NYSE: AMD) gained $1 1/4 to $18 as Reuters reported that Merrill Lynch raised its 1999 earnings estimate to $0.70 a share from breakeven. That would be quite an upgrade. First Call lists the mean 1999 EPS estimate for the company among 23 analysts as $0.78. According to IBES, the mean of 27 estimates for 1999 is $0.80, with the high being $1.50 and the low being breakeven.

Chiron Corp. (Nasdaq: CHIR) added $7/16 to $17 5/16 after announcing it will sell its in vitro diagnostics subsidiary, Chiron Diagnostics Corp., to Germany's Bayer Group for an up-front sum in excess of $1.1 billion in cash. In addition, Chiron will license certain intellectual property pertaining to hepatitis C and human immunodeficiency virus (HIV) for use in nucleic acid diagnostics worldwide to Bayer in exchange for future royalties.

Irvine, Calif.-based coffee retailer, wholesaler and roaster Diedrich Coffee Inc. (Nasdaq: DDRX) brewed up a gain of $1 1/4 to $6 1/4 after late yesterday announcing it has signed an agreement with Tacala Inc., the largest franchisee of Taco Bell fast food restaurants, whereby Tacala will develop 44 coffeehouses and an undisclosed number of carts and kiosks in North Carolina in the next five years.

Fish oil and marine protein products maker Omega Protein Corp. (NYSE: OME) moved up $11/16 to $7 3/16 after announcing plans to buy back up to 4 million shares, calling its stock "tremendously undervalued."


Shaving products, toothbrushes, and batteries maker Gillette Co. (NYSE: G) was nicked another $2 15/16 to $37 1/4 after Merrill Lynch cut its fiscal 1998 and 1999 earnings estimates and Donaldson, Lufkin & Jenrette reduced its rating on the stock to "market perform" from "top pick." The actions follow reports yesterday that the firm told analysts to cut their fiscal Q3 earnings estimates due to weakness in its international markets.

Investment bank and brokerage firm Merrill Lynch (NYSE: MER) fell $2 7/16 to $56 9/16 after unnamed "officials" at the firm told Bloomberg News that the company is planning to fire as many as 350 staff members following recent trading losses tied to the Russian and Asian financial crises.

Restaurant operator Lone Star Steakhouse & Saloon (Nasdaq: STAR) was grilled for a $1 3/16 loss to $6 7/8 after reporting fiscal Q3 EPS of $0.10 versus $0.37, missing the First Call mean estimate of $0.14. The company said its same-store sales declined 7.7% in the quarter, contributing to a 8.2% slide in same-store sales year-to-date.

Adult higher education services firm Apollo Group (Nasdaq: APOL) lost $10 1/4 to $26 1/2 after The Wall Street Journal's "Heard on the Street" column raised concerns about an ongoing federal audit of how the company manages its federal financial aid programs as well as worries about the growing accounts receivables figures at the firm.

Transportation services and logistics company J.B. Hunt Transport Services (Nasdaq: JBHT) jack-knifed for a $7 1/8 loss to $15 1/4 after saying a slowdown in rail service has hurt its intermodal business and will trim $0.10 to $0.15 from its earnings per share for fiscal Q3. The company expects to miss the First Call mean earnings estimate of $0.46 per share for the quarter even though revenues are forecasted to come in around 20% above last year's levels.

The American depositary shares of French telecommunications equipment company Alcatel (NYSE: ALA) fell $11 3/8 to $19 15/16 this morning after the company warned that its fiscal 1998 operating results will "not meet expectations" due to the financial crisis in Asia and Russia and "sharp investment cuts" by some of its clients. Other telecom-related ADRs fell as well. Nokia Corp. (NYSE: NOK.A) slid $6 5/8 to $74 11/16, Ericsson (Nasdaq: ERICY) sank $1 5/8 to $18 5/16, Telefonos de Mexico (NYSE: TMX) slipped $2 9/16 to $40 1/2, and Telebras (NYSE: TBR) slumped $4 1/4 to $67 1/4.

Greeting cards maker American Greetings (NYSE: AM) was shredded $3 to $41 after reporting fiscal Q2 EPS of $0.20, which was $0.03 better than last year's results (excluding a one-time gain) and in line with the Street's mean estimate. However, the company said it will take a $10 million to $20 million pre-tax charge in Q3 as part of a cost-cutting effort and "reassessment of management resources."

Semiconductor photomasks manufacturer Dupont Photomask (Nasdaq: DPMI) was burned for a $5 5/8 loss to $22 after saying its fiscal Q1 revenues could fall as much as 10% to 16% below last year's figures, resulting in EPS between $0.19 and $0.24, which will miss the Street's estimate of $0.39. The company blamed the shortfall on the continuing downturn in the chip industry and "intense pricing pressure."

Electric utility PacifiCorp (NYSE: PPW) was zapped for $2 1/16 to $21 after saying that its fiscal Q3 will be about half of the First Call mean estimate of $0.41 per share due to higher margins caused by a shortage of low-cost hydroelectric power in the Northwest U.S. during July and August.

K-B Toys and MacFrugals Bargains Close-Outs retail stores operator Consolidated Stores Corp. (NYSE: CNS) was marked down $2 3/4 to $25 15/16 after Donaldson, Lufkin & Jenrette downgraded the company to "market perform" from "buy."


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