The Lunchtime News's Fool Plate Special focused on Iomega's rebound today. We also have a Special Section on upcoming initial public offerings (IPOs). If this isn't enough, check out some recent FoolWires -- we've got 'em on Nautica, Adobe, and the Nasdaq's recent woes.
MF Merlin's Economic News today examines the economic implications of recent reports on unemployment claims and help-wanted advertising. You'll find the Economic News, as well as all our Special Sections, FoolWires, and earnings reports, on either the Evening News or Stock Research screens. In tonight's Fool on the Hill, MF Templar focuses on IVAX and other makers of generic pharmaceuticals. Enjoy!
ORTHOLOGIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OLGC)") else Response.Write("(NASDAQ: OLGC)") end if %> rose $2 1/8 to $12 this morning after reporting that it was comfortable with analyst's second quarter estimates. The company has named George Oram as its new chief executive officer (CEO) and is pursuing a "rapid" resolution to the Food & Drug Administration (FDA) warning letter it received earlier this month. Meanwhile, the company was slapped with its third class action suit in the space of a week. The suits allege that the company released misleading statements about its OrthoLogic 1000 bone growth stimulator. Chairman Allan Weinstein responded that, "We believe that [the suits] are meritless and we will defend against them."
Electronic information exchange specialist ISOCOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ICOR)") else Response.Write("(NASDAQ: ICOR)") end if %> announced a new Internet directory application kit for windows NT yesterday, and shot up $1 3/4 to $14 1/2 today. Translated into English, the announcement reveals software which permits the integration of Internet technologies with relational database applications such as Oracle, Informix, Sybase, and Microsoft Jet. Thus, Internet searches might be able to tap into organizations' existing databases.
J.P. Morgan put itself on the other side of the Cabot Market Letter this morning when it initiated coverage of removable storage concern IOMEGA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IOMG)") else Response.Write("(NASDAQ: IOMG)") end if %> with a "buy", sending shares zipping $6 1/2 to $27 1/2. The analyst, Daniel Kunstler, cited estimates of $0.52 EPS for fiscal 1996 and set a 12-month price target of $42. J.P. Morgan is one of the two firms that is underwriting Iomega's secondary offering and its positive coverage of Iomega is not a major surprise. However, the fact that they have come out on the high side of fiscal 1996 estimates with a fairly lofty price target shows that the analyst has faith in the ability of Iomega to execute its business plan as currently stated. Iomega supplier IMP INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IMPX)") else Response.Write("(NASDAQ: IMPX)") end if %> rose $1 15/16 to $10 7/16 a day after announcing that JMAR INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: JMAR)") else Response.Write("(NASDAQ: JMAR)") end if %> would manufacture gate arrays for IMP, while Iomega competitor SYQUEST <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SYQT)") else Response.Write("(NASDAQ: SYQT)") end if %> also advanced, up $7/8 to $8 3/8.
QUICK TAKES: WMS INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMS)") else Response.Write("(NYSE: WMS)") end if %> decided its days as a gaming equipment, arcade and casino operator were over today -- the board announced that it would spin-off its Puerto Rico casinos and sell a 15% interest in its arcade operations. Shares were up $2 1/8 to $24 1/8... TARGET THERAPEUTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TGET)") else Response.Write("(NASDAQ: TGET)") end if %> reported this morning that it knew of no material reason why the stock was killed yesterday. They do not believe that the Medtronic ruling yesterday affects their business and they see revenue growth continuing. Shares recovered $3 1/4 to $37 3/4 on this news and Alex. Brown reiterated a "buy"... CYRIX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CYRX)") else Response.Write("(NASDAQ: CYRX)") end if %> surged $2 9/16 to $16 1/2 after Goldman Sachs initiated coverage by adding the microprocessor manufacturer to its recommended list... ACCENT SOFTWARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ACNTF)") else Response.Write("(NASDAQ: ACNTF)") end if %> advanced $3 3/8 to $29 7/8 after signing an agreement with IBM UK Ltd and agreeing to bundle software and modems with DIGI INT'L <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DGII)") else Response.Write("(NASDAQ: DGII)") end if %>... .. Process management instrumentation supplier TYLAN GENERAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TYGN)") else Response.Write("(NASDAQ: TYGN)") end if %> was boosted $2 1/4 to $12 1/8 as investors waxed speculative on news that Danaher Corp. has been buying up shares in the company.
Looks like that Wall Street Journal article yesterday was correct. MEDCATH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MCTH)") else Response.Write("(NASDAQ: MCTH)") end if %> fell $3 7/8 to $11 3/4 after it said it would only earn $0.08 to $0.11 EPS versus expectations of $0.16 EPS because of losses at its McAllen Heart Hospital -- just like the reporter said yesterday. Blamed were seasonal population shifts, with retirees moving in and out of the area for the summer and winter. MedCath reiterated its strong belief in the heart hospital concept, which aims to offer high quality care at lower costs.
SAFETY 1ST <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SAFT)") else Response.Write("(NASDAQ: SAFT)") end if %> had a little accident this morning, falling $3 to $8. It sees second quarter earnings at $0.06 to $0.10 EPS a share versus expectations of $0.25 EPS, will not meet its 1996 sales target, and was cut from "buy" to "hold" by Prudential. Another "safe" concern looking for a net today was SAFEWAY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWY)") else Response.Write("(NYSE: SWY)") end if %>, dropping $2 1/4 to $32 1/4. Safeway was downgraded from "buy" to "outperform" by Smith Barney on concerns that the stock trades at a premium to the rest of its sector, and that a strike in British Columbia might restrain earnings.
On Wednesday, the Fool Plate Special in the Lunchtime News talked about how information that an intelligent investor could have already figured out sometimes impacts a company's shares in a surprising way. An example of this phenomenon is QUAKER OATS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OAT)") else Response.Write("(NYSE: OAT)") end if %>, which announced today that 1996 earnings will be $0.13 to $0.18 EPS lower than previously expected because of cereal price cuts and lower-than-expected Snapple sales. Anyone following the cereal industry over the past few weeks as seen Post (Philip Morris), Kellogg and General Mills all say they were going to slash prices. That people are suddenly surprised that Quaker is going to do the same is somewhat surprising, as it would have been pretty easy to infer that Quaker would have to take a cut as well. Prudential and DLJ lowered their estimates on Quaker, and shares were boiled down $2 to $33 3/4.
QUICK CUTS: OREGON METALLURGICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OREM)") else Response.Write("(NASDAQ: OREM)") end if %> slumped $2 5/8 to $26 1/4 after filing a public offering of 3.5 million shares yesterday, which raised the ugly specter of potential dilution... COREL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: COSFF)") else Response.Write("(NASDAQ: COSFF)") end if %>, which recently purchased WordPerfect from NOVELL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NOVL)") else Response.Write("(NASDAQ: NOVL)") end if %>, dropped $1 5/8 to $10 3/8 after reporting disappointing second quarter earnings and saying that it sees third quarter revenues of $100 to $120 million... News that THORATEC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: THOR)") else Response.Write("(NASDAQ: THOR)") end if %> would offer 1.5 million shares at $12 a share caused the stock to get whacked for $2 1/2 to $12... QUEST MEDICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: QMED)") else Response.Write("(NASDAQ: QMED)") end if %> shares continued in their quest for rock-bottom, sliding $1/2 to $6 on expectations of poor earnings. Shares were priced over $14 only a month ago.
An Investment Perspective
by Randy Befumo (MF Templar)
FOOL ON THE HILL
IVAX and the Generic Drug Makers
IVAX PHARMACEUTICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: IVX)") else Response.Write("(AMEX: IVX)") end if %> single-handedly shook up the generic drug companies today when it forecast dramatically lower earnings than had previously been expected. IVAX reported to the Street this morning that it should be looking for $0.06 to $0.08 EPS per share in the upcoming quarter -- dramatically lower than the $0.30 EPS or so that analysts were looking for.
IVAX reported "significant customer inventories of important generic drugs, price declines for certain generic drugs, and related credits provided to customers". "As is the practice in the industry, where necessary, we adjust certain customers' accounts with credits or other allowances to reflect price declines", IVAX Chairman and Chief Executive Officer (CEO) Phillip Frost. This means that when prices for generic drugs tank, customers get credited the difference for anything they still happen to have in inventory.
What worsens IVAX's situation is that they have been meeting their aggressive growth targets by pumping up their customers' inventories -- meaning that their potential liability in any price decline situation is extreme. Historically, IVAX has also engineered a good portion of its rapid growth through acquisitions. The acquisition pipeline has atrophied due to growing consolidation in the industry, meaning that IVAX has no smaller rivals to chew up any more to accelerate growth. Thus they have a lot of customers with a lot of inventory who will not be paying for any drugs over the next few months. This is why the CEO stated, "Although reorders should improve as inventories are depleted, we expect to be addressing all of these factors to some extent for the balance of the year."
The reason for the recent price declines has to do with the ethical (i.e. non-generic) pharmaceutical companies and the government. The ethical pharmaceutical companies are the big names that most investors are familiar with -- Merck, Schering Plough, Pharmacia and so on. Many industry wags had expected these companies to get out of the generic pharmaceutical business because of the smaller profit margins. The opposite has occurred over the last few months, with many of these companies aggressively defending their market share in the generic drug market. Or, as Frost more delicately put it, "Prices for certain of these [generic] drugs have declined, however, following launches of generic versions of the same drugs by competitors who have adopted aggressive pricing strategies."
An example of this was given today in a Dow Jones newswire. Schering-Plough Corp. has been fighting for market share in the inhaler market by marketing a generic version of its own Proventil, taking 65% to 70% of the market share. The blood pressure drug Verapamil was also listed as another one of IVAX's generics that has been under intense price competition.
Adding to the downward pressure in prices is pending government reform. According to our own Joe Newell (MF Health), Medicare and some Medicaids currently use "red book", or the Average Wholesale Price (AWP), to reimburse health care providers. It is becoming increasingly evident, however, that Medicare and some Medicaids are the *only* people who are paying anything close to the AWP, with the majority of large managed care providers strong-arming the drug companies into substantial discounts. The details of this pending reform were laid out in an excellent article in the June 9th issue of Barron's.
Merrill Lynch's analyst Richard Vietor lowered his intermediate- and long-term rating to "neutral" from "buy", cutting 1996 estimates back to $0.95 EPS from $1.30 to $1.35 EPS. In a research note, Vietor glumly stated that his thesis that IVAX could generate earnings growth through new drug approvals "has collapsed". Vietor was not the only analyst slashing his rating today, either -- the Gruntal & Co. analyst basically took the entire group to the woodshed, shocked at the depth of the problem revealed by IVAX's woes.
There seem to be two areas of opportunity here at first glance. If you accept the thesis that IVAX's problems are a result of its over-aggressive growth policy, then the fact that all of them have been tarred with the same brush might imply that one or more of IVAX's competitors has become mispriced after today. A Foolish look at assets, past growth and market share would potentially yield some interesting investing possibilities. On the flip side, anyone mirroring IVAX's aggressive style might have an earnings disappointment pending that has yet to be announced, implying that there might be a nice shorting opportunity among the group. On this end, pay particular attention to companies who multiple is supported by aggressive long-term growth rates out of line with the industry or pending generic approval.
Here is how the generic drug companies traded today:
IVAX Corp. down $8 5/8 to $15 1/4;
TEVA PHARMACEUTICALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TEVIY)") else Response.Write("(NASDAQ: TEVIY)") end if %> lost $3 1/4 to $34 1/2, its downside exacerbated by worries over one of its own products;
WATSON PHARMACEUTICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WATS)") else Response.Write("(NASDAQ: WATS)") end if %> slid $1 3/4 to $38;
MYLAN LABS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MYL)") else Response.Write("(NYSE: MYL)") end if %> fell $1/4 to $16 7/8;
ALPHARMA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALO)") else Response.Write("(NYSE: ALO)") end if %> swallowed $1 1/2 to end up at $19 5/8;
BARR LABS <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: BRL)") else Response.Write("(AMEX: BRL)") end if %> hung $7/8 lower to $26 1/4;
FAULDING INC. (NASDAQ FAUL) ran against the grain, rising $7/16 to $4 13/16;
FOREST LABS <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: FRX)") else Response.Write("(AMEX: FRX)") end if %> gave up $1 1/4 to $38 3/8;
PERRIGO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PRGO)") else Response.Write("(NASDAQ: PRGO)") end if %> was unchanged at $10 3/4;
ROYCE LABS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RLAB)") else Response.Write("(NASDAQ: RLAB)") end if %> was crunched for $13/16 to $5 1/8.