DJIA 8089.78 +65.39 (+0.81%) S&P 500 1045.47 +7.79 (+0.75%) Nasdaq 1689.90 +11.79 (+0.70%) Value Line ndx 801.40 +5.74 (+0.72%) 30-Year Bond 104 4/32 +17/32 5.22% Yield
Online media streaming technologies company RealNetworks <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RNWK)") else Response.Write("(Nasdaq: RNWK)") end if %> gained $4 7/8 to $24 1/2 after announcing that it will license online video streaming technology from Intel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %>. In addition, Intel will help RealNetworks promote and market the technology to video users on the Web. While the licensing deal will not directly generate additional near-term profits or revenues for the Seattle-based company, announcing to the public that your company has a business relationship with chip giant Intel never seems to hurt. Often, Intel will also take an equity stake in the companies with which it forms similar development partnerships, such as its July purchase of an 8.2% non-voting stake in visual systems developer Evans & Sutherland <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ESCC)") else Response.Write("(Nasdaq: ESCC)") end if %>. Already, Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> has decided that RealNetworks is a good enough investment opportunity to warrant a 10% equity stake.
Discount brokerage leader Charles Schwab <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SCH)") else Response.Write("(NYSE: SCH)") end if %> advanced $3 3/8 to $40 9/16 after announcing that it expects to report an estimate-beating earnings performance for its third quarter. The San Francisco-based discount brokerage pioneer and Internet brokerage leader said heavy trading volumes, the strength of its domestic business, good expense and risk management, and "the absence of any international proprietary trading" accounted for expected earnings of $90 to $97 million, or diluted EPS of $0.30 to $0.35. Analysts had been expecting EPS of $0.28 to $0.32, with a mean estimate of $0.30, so the performance beat the guidance of management. In outperforming the market since midyear, Schwab has proved that price isn't the key point to performance in the discount brokerage world. Instead, good infrastructure, product offerings, and excellent mindshare among customers have been more instrumental in keeping the company the King of the Hill.
Sunrise Assisted Living Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SNRZ)") else Response.Write("(Nasdaq: SNRZ)") end if %> moved up $4 3/4 to $30 after BankBoston Robertson Stephens analyst Sheryl Skolnick upgraded the provider of elderly assisted living services to "buy" from "market perform." In an interview with CNBC, Skolnick said firms like Sunrise "are not dependent on the government for their livelihoods and are faring pretty well" compared with other healthcare providers, such as managed care providers and for-profit hospital operators. The comments speak to the problems the healthcare industry has faced since Congress decided to trim roughly $20 billion from Medicare reimbursements to HMOs over the next five years in an effort to balance the budget. The cuts already have prompted Humana <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HUM)") else Response.Write("(NYSE: HUM)") end if %>, Aetna <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AET)") else Response.Write("(NYSE: AET)") end if %>, and Foundation Health <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FHS)") else Response.Write("(NYSE: FHS)") end if %> to bail out of some their Medicare HMO business. Sunrise rival CareMatrix Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: CMD)") else Response.Write("(AMEX: CMD)") end if %>, which Skolnick also has a good feeling about, rose $5 1/16 to $20 13/16.
QUICK TAKES: Wireless communications systems and chip maker Motorola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOT)") else Response.Write("(NYSE: MOT)") end if %> tacked on $3 5/16 to $47 1/4 after agreeing to sell its components products division to CTS Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CTS)") else Response.Write("(NYSE: CTS)") end if %> for an estimated 1.2 times the unit's annual sales. CTS gained $1 1/2 to $29 1/2 on the news. Motorola also said it will halt construction of a new chip plant near Richmond, Virginia, due to low chip demand and prices... Telecommunications network access equipment maker Teledata Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TLDCF)") else Response.Write("(Nasdaq: TLDCF)") end if %> rose $1 to $14 3/8 after high-speed network transmission systems developer ADC Telecommunications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADCT)") else Response.Write("(Nasdaq: ADCT)") end if %> agreed to buy the company for $15.75 per share in cash. ADC gained $2 to $25 7/8.
Wireless radio frequency chip maker RF Micro Devices <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RFMD)") else Response.Write("(Nasdaq: RFMD)") end if %> climbed $1 7/8 to $18 5/8 after saying higher-than-anticipated wafer availability from a supplier and higher demand from its Korean clients will result in fiscal Q2 EPS of $0.09 to $0.10, beating the Street's mean estimate of $0.06... Satellite-based communications services company PanAmSat Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPOT)") else Response.Write("(Nasdaq: SPOT)") end if %> was launched $3 1/4 to $43 3/8 after saying that its PAS-7 video and communications satellite was successfully sent into orbit early this morning. Loral Space & Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LOR)") else Response.Write("(NYSE: LOR)") end if %>, which built the satellite, rose $1 5/16 to $14 3/8... Casual clothing retailer Abercrombie & Fitch Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ANF)") else Response.Write("(NYSE: ANF)") end if %> advanced $1 7/8 to $50 7/8 on news that it will be added to the Standard & Poor's MidCap 400 index to replace Saks Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SKS)") else Response.Write("(NYSE: SKS)") end if %>, which is merging with Proffitt's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFT)") else Response.Write("(NYSE: PFT)") end if %>.
Family apparel retailer Stage Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGE)") else Response.Write("(NYSE: SGE)") end if %> gained $2 1/4 to $14 7/8 after saying it is comfortable with the Street's mean fiscal Q3 earnings estimate of $0.06 per share, although it is "cautious" about the business outlook for the remainder of the quarter and into Q4... Junior casual apparel retailer Wet Seal Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WTSLA)") else Response.Write("(Nasdaq: WTSLA)") end if %> rose $2 5/16 to $16 7/8 after announcing it will repurchase an additional 10% of its outstanding shares... Sporting goods retailer The Sports Authority <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TSA)") else Response.Write("(NYSE: TSA)") end if %> added $11/16 to $7 5/8 after announcing that the CEO title will be added to the office door of current vice chairman Martin Hanaka. Founder and previous CEO Jack Smith will retain his role as chairman... Midmarket server-based enterprise software developer Great Plains Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GPSI)") else Response.Write("(Nasdaq: GPSI)") end if %> gained $3 3/16 to $41 15/16 after reporting fiscal Q1 EPS of $0.15, beating the Street's mean estimate by a penny.
Enterprise application software firm Progress Software Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PRGS)") else Response.Write("(Nasdaq: PRGS)") end if %> advanced $1 1/4 to $24 3/4 after reporting fiscal Q3 EPS of $0.31, topping the Street's mean estimate of $0.24... Direct mail and telemarketing services firm Damark International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DMRK)") else Response.Write("(Nasdaq: DMRK)") end if %> moved up $23/32 to $6 1/16 after saying it will buy back up to 2 million of its outstanding Class A shares... Electrical and electronic components maker Technitrol <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TNL)") else Response.Write("(NYSE: TNL)") end if %> gained $1 5/16 to $22 1/4 after saying it will repurchase an undisclosed number of its outstanding shares from time to time... Investment management holding company Nvest, L.P. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NEW)") else Response.Write("(NYSE: NEW)") end if %> rose $2 1/4 to $26 1/2 after announcing a plan to repurchase up to 1 million limiting partnership units of Nvest and its Nvest Cos., L.P. operating partnership.
Thrift holding company Washington Mutual <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WAMU)") else Response.Write("(Nasdaq: WAMU)") end if %> added $3 1/16 to $38 3/16 after the Office of Thrift Supervision approved its proposed merger with H. F. Ahmanson & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AHM)") else Response.Write("(NYSE: AHM)") end if %> yesterday... Financial services firm Bankers Trust <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BT)") else Response.Write("(NYSE: BT)") end if %> tacked on $3 5/16 to $68 1/8 after declaring its regular $1 per share quarterly dividend yesterday, despite its recent announcement that it will report a net loss in fiscal Q3 due to trading losses in emerging markets... Credit card lender Providian Financial Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PVN)") else Response.Write("(NYSE: PVN)") end if %> gained $5 9/16 to $78 1/2 following a Prudential Securities upgrade to "strong buy" from "accumulate"... FirstPlus Financial Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FP)") else Response.Write("(NYSE: FP)") end if %> surged $1 7/8 to $17 13/16 on rumors that that the consumer finance company is attracting buyout interest from Providian Financial, Banc One <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ONE)") else Response.Write("(NYSE: ONE)") end if %>, and General Electric's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %> GE Capital unit.
Teleconferencing and videoconferencing tools maker Polycom Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PLCM)") else Response.Write("(Nasdaq: PLCM)") end if %> rang up $3 to $13 7/8 after Bell South <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BLS)") else Response.Write("(NYSE: BLS)") end if %> agreed to distribute the company's ViewStation group teleconferencing products... Radio and TV station operator Chancellor Media Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMFM)") else Response.Write("(Nasdaq: AMFM)") end if %> climbed $1 9/16 to $32 after saying yesterday that certain affiliates of controlling shareholder Hicks, Muse, Tate & Furst may buy up to $100 million of Chancellor shares, depending on market conditions... Magazine, books, and recorded music publisher Reader's Digest Association <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RDA)") else Response.Write("(NYSE: RDA)") end if %> advanced $1 13/16 to $19 15/16 after saying it hopes to raise $200 million in asset sales next year, which will include part of the company's art collection. The firm will also cut its quarterly dividend to $0.05 per share from $0.225 per share and will cut back on its individual mailings in an effort to cut costs.
Hotel real estate investment trust (REIT) Patriot American Hospitality <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PAH)") else Response.Write("(NYSE: PAH)") end if %> added $1 3/8 to $13 3/4 after the company decided to keep its paired-share REIT status, despite rival Starwood Lodging's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HOT)") else Response.Write("(NYSE: HOT)") end if %> recent announcement that it will change to corporation status. Patriot American said the paired-share format will maximize its "internal growth potential"... Wine producer Robert Mondavi Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MOND)") else Response.Write("(Nasdaq: MOND)") end if %> gained $1 7/8 to $26 1/4 courtesy of an upgrade by Donaldson, Lufkin & Jenrette to "buy" from "market perform"... Motorcycle maker Harley-Davidson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HDI)") else Response.Write("(NYSE: HDI)") end if %> motored ahead $1 1/4 to $33 after Salomon Smith Barney started coverage with a "buy" rating, saying the stock should trade at a premium to the general market due to the visibility of its earnings growth.
Personal grooming products and Duracell batteries maker Gillette <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: G)") else Response.Write("(NYSE: G)") end if %> was cut $4 13/16 to $40 3/16 after it reportedly told analysts to reduce their third quarter sales expectations "due to the broad base weaknesses in many international markets," according to Reuters. Prudential Securities analyst Carol Warner lowered her Q3 earnings estimate for the company to $0.38 a share on an operating basis from $0.40. She also cut her Q4 estimate to $0.39 from $0.41. "From what we understand, sales are going to be down about 2%" overall in Q3, she said. International sales made up 63% of Gillette's total revenues and 62% of total profits last year. Company spokesman David Fauch told Reuters, "It's the economic situation in places like Russia, Asia, Latin America" that is dragging down sales, and it has "nothing to do with MACH3," the new razor the company spent more than $750 million to develop.
Team sports equipment and apparel maker Rawlings Sporting Goods <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAWL)") else Response.Write("(Nasdaq: RAWL)") end if %> was hit with a $7/8 loss to $9 7/8 after warning that it expects a fiscal Q4 loss of $0.23 to $0.28 per share due to lower-than-anticipated sales of baseball-related products as well as a delay in basketball and football orders. The company also said it is immediately discontinuing the sale of adult 2 3/4 inch barrel aluminum baseball bats to meet new NCAA rules that will go into effect in the 2000 season that limit the maximum barrel diameter to 2 5/8 inches. Rawlings will write off all 2 3/4 inch bats currently in inventory. St. Louis-based Rawlings said it is encouraged by the continued resurgence of baseball and the impact of hometown slugger Mark McGwire breaking the homerun record. The company has a partnership with McGwire, who just hit his 63rd homerun last night, and expects increased revenues from authentic McGwire collectibles. "We are optimistic that double digit earnings and sales growth are achievable in [fiscal] 1999," the company said.
Government-sponsored student loan funds provider SLM Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLM)") else Response.Write("(NYSE: SLM)") end if %>, a.k.a. Sallie Mae, slid $7/8 to $33 7/8 after The Wall Street Journal's "Heard on the Street" column reported that SLM's third quarter earnings growth could evaporate due to disruptions in the asset-backed securities market, which could make it more expensive for the company to resell the student loans it buys from small banks around the country. The column, which states that Q3 securitizations are "in question," seems to be about a week behind the news. Last Thursday, SLM announced that "due to the turbulence in the global financial markets, it is unlikely that it will be issuing student loan asset-backed securities in the third quarter." SLM stock fell on the day of the announcement but quickly recovered in the next two days. True to form, while suggesting that SLM's earnings may suffer, "Heard on the Street" adds at the very end of the piece that "most analysts haven't touched their third-quarter estimates yet."
QUICK CUTS: Wireless communications company Ericsson AB <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ERICY)") else Response.Write("(Nasdaq: ERICY)") end if %> American depositary receipts fell $1 13/16 to $19 15/16 on concern that demand will slow in its fastest-growing markets... Minimally invasive medical devices maker Circon Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CCON)") else Response.Write("(Nasdaq: CCON)") end if %> plunged $3 3/8, or 25.5%, to $9 7/8 after U.S. Surgical Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: USS)") else Response.Write("(NYSE: USS)") end if %> late yesterday announced that it had terminated its tender offer for the company in light of U.S. Surgical's proposed merger with Tyco International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TYC)") else Response.Write("(NYSE: TYC)") end if %> and Circon's recent announcement that it has invited other companies to make acquisition bids... Discount fashion retailer Stein Mart <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SMRT)") else Response.Write("(Nasdaq: SMRT)") end if %> tanked $1 17/32 to $6 5/8 after announcing that it expects to incur a "modest" net loss for the third quarter compared with expectations of EPS of a nickel a share.
Trucking company Arkansas Best Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ABFS)") else Response.Write("(Nasdaq: ABFS)") end if %> plummeted $2 3/16 to $5 1/16 after warning that it expects Q3 EPS to be 15% to 20% lower than EPS from continuing operations of $0.39 in the same year-ago period. That means Q3 EPS will be roughly $0.31 to $0.33 compared with analysts' expectations of $0.46... Host Marriott Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HMS)") else Response.Write("(NYSE: HMS)") end if %> slid $1 3/16 to $10 after the food, beverage, and merchandise concessions operator warned that fiscal Q3 earnings will fall below analysts' estimates due to the Northwest Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NWAC)") else Response.Write("(Nasdaq: NWAC)") end if %> strike and a drop in Asian travel... Aeroquip-Vickers Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ANV)") else Response.Write("(NYSE: ANV)") end if %>, which makes engineered components and systems for the industrial, aerospace, and automotive markets, tumbled $7 1/2 to $33 1/4 after warning it expects Q3 EPS of $0.80 to $0.87, lower than analysts' expectations of $1.00 to $1.11.
Metal alloy manufacturer Carpenter Technology Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CRS)") else Response.Write("(NYSE: CRS)") end if %> dropped $5 5/16 to $31 3/8 after announcing it expects fiscal Q1 EPS of $0.50 to $0.55 compared with $0.82 last year and analysts' expectations of $0.68. The company also expects Q2 earnings to fall below those of the same year-earlier period of $0.89 a share... Cement and structural steel supplier Texas Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TXI)") else Response.Write("(NYSE: TXI)") end if %> fell $3 5/16 to $28 5/8 after reporting fiscal Q1 EPS of $1.17, which was a penny above last year but short of analysts' mean estimate of $1.23... Midway Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MDWY)") else Response.Write("(Nasdaq: MDWY)") end if %> dropped $2 3/8 to $14 1/8 after Morgan Stanley Dean Witter lowered its rating on the company to "outperform" from "strong buy" and cut its EPS estimates to $1.56 from $1.66 for this year and to $1.90 from $1.95 for next year.
Healthcare management consultant Concentra Managed Care <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CCMC)") else Response.Write("(Nasdaq: CCMC)") end if %> sank $1 1/8 to $6 9/16 after announcing the resignation of its chairman and CEO, Donald Larson, who is pursuing other interests. The company's board appointed President and COO Daniel Thomas to the additional post of interim CEO... Competitive local exchange carrier US LEC Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CLEC)") else Response.Write("(Nasdaq: CLEC)") end if %> fell another $2 3/4 to $8 3/4 as the company denied allegations from Bell South <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BLS)") else Response.Write("(NYSE: BLS)") end if %> that it tried to gouge the Baby Bell on the price of calls originating on one of the companies' networks and ending on the other's network... Furniture maker Bush Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BSH)") else Response.Write("(NYSE: BSH)") end if %> was cut $3 1/4 to $14 7/8 after announcing it expects Q3 EPS of $0.05 to $0.10 and Q4 EPS of $0.25 to $0.30, substantially short of analysts' mean estimates of $0.31 for Q3 and $0.59 for Q4. The company expects Q3 sales to fall 8% to 12% primarily because of delays in introducing new products.
FOOL
ON THE HILL
An Investment Opinion
by
Louis Corrigan
Cephalon's Trials
Earlier this year, commentators compared the frenzied buying of Internet stocks to the biotech bubbles of the early '80s and early '90s. Every bubble does tend to resemble others before it. Even so, each turns out to be unhappy in its own way. A major difference between biotechs and Internet outfits is that the best of the latter not only have a marketable product but also millions of daily or monthly customers. The average investor can at least test-drive the product and develop a fair idea of what he's buying -- or passing up.
By contrast, even the most promising and talked about biotechs often can't be sure they even have a marketable product. Crossing the threshold of Food and Drug Administration (FDA) regulatory approval can create a temporary monopoly for a biotech, a moat with no equivalent among Internet portals or commerce companies. But until a firm gets that nod from the FDA, it has neither a moat nor even a castle. What's worse, even so-called experts don't do so hot at predicting regulatory approval. In that sense, biotech investing seems an order of magnitude riskier than Internet investing. Even knowing as much as you can know, you still don't know much.
The trials of Cephalon <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CEPH)") else Response.Write("(Nasdaq: CEPH)") end if %> offer a case in point. This development stage company has focused mainly on central nervous system disorders. Myotrophin, its lead drug developed in collaboration with biotech giant Chiron <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CHIR)") else Response.Write("(Nasdaq: CHIR)") end if %>, is designed to treat Amyotrophic Lateral Sclerosis (ALS), a degenerative and ultimately deadly neurological ailment commonly known as Lou Gehrig's disease. Currently, Rhone-Poulenc Rorer's Rilutek is the only drug approved in the U.S. for the treatment of ALS. Cephalon's second drug, Provigil, is for use in the treatment of narcolepsy. In January 1996, Cephalon traded above $40 a share on high hopes for FDA approval of Myotrophin. Since then, it's plunged to $6, not far from its recent low of $3 7/8.
The road to this "bio-wreck" has been paved with unmet expectations. In June 1996, an FDA advisory panel granted Cephalon's treatment investigational new drug (IND) application, which allowed Myotrophin to be offered on a compassionate use basis. However, the panel was unimpressed by the data from the company's two Phase III clinical trials. A North American study showed significant clinical benefit, but a follow-up trial in Europe did not. Death rates in this European trial were actually higher for the patients taking Myotrophin than for those on the placebo. Some observers concurred with Cephalon's view that the European study wasn't large enough to attain statistical significance and that the patients on the therapy were sicker to begin with. The FDA panel agreed that safety wasn't a problem, yet efficacy was. Some panel members wanted Cephalon to conduct a third trial.
With enormous support for the drug from the ALS patient community and political pressure on the FDA to approve the drug, Cephalon stood pat, merely reworking the existing data. The firm's management was so confident that it made a controversial call option bet just prior to the FDA panel's next meeting in May 1997. By a vote of 6 to 3, the panel concluded that there wasn't "substantial evidence" to show the drug was effective. The stock was sliced in half to around $10 a share. Yet some observers still believed that the FDA would approve Myotrophin. The agency usually follows the recommendation of its advisory panels, but the highly political process allows room for the FDA to overrule its panels.
So the saga continued. The shares recovered to $16 by May of this year on anticipation of FDA action on Cephalon's new drug application (NDA). The agency said it was indeed ready to clear the drug but only after it received additional data from the ongoing compassionate use program. This unusual "sorta maybe" okay left investors befuddled. As time passed, it seemed increasingly likely that Cephalon's negotiations with the FDA simply weren't going well.
The shares edged ever lower, with investors discounting the possibility that U.S. approval was dead, but still hoping that the Europeans would clear the drug. That hope was dashed yesterday when Cephalon announced it was withdrawing its application for marketing approval in Europe because a review committee there wasn't convinced the drug works. Cephalon CEO Frank Baldino, Jr. said, "It is not possible to resolve these issues within the time frame allotted to the review process." So for now, the company doesn't plan to pursue the matter further. The stock, which had recently rallied off its lows on expectations of good news, fell $1 3/16 to $5 1/4 on this report.
Some observers argue that Cephalon even now represents an uncommon value. In December, the FDA sent the company an approvable letter for Provigil. The narcolepsy drug could hit the market later this year pending final labeling approval by the FDA. The U.K. and Ireland have also approved the drug. In addition, company spokesperson Jason Rubin told Bloomberg News yesterday that Cephalon has given the FDA the additional data on Myotrophin that the agency requested. "It is our hope that we can get some indication from the agency one way or another this month," he said.
The company has $76.5 million in cash and short-term investments plus another $15.2 million set aside to purchase the rights to Myotrophin, if it is approved. With 28.9 million fully diluted shares at the current price, Cephalon has about $3.21 a share in cash. It also has an accumulated deficit of $246 million, which pretty much eliminates tax obligations for years to come if it can start generating profits. The downside is that the company is still burning cash ($12.6 million in the second quarter); the fully diluted sharecount could jump by 6.2 million shares due to options and warrants if the stock gets above $6.50; and Cephalon will face some other financial obligations if Myotrophin wins approval.
Still, it's enlightening to consider just what a challenge Cephalon has been for the biotech experts.
-- Dr. Harry M. Tracy, editor of the well-regarded NeuroInvestment newsletter, told me in June 1997 that he thought the odds were 2-to-1 in favor of FDA approving Myotrophin by the November 1997 deadline. Instead, Cephalon withdrew and then resubmitted its application to buy more time.
-- Respected biotech investor Sarah Gordon manages money for Amerindo Investment Partners, a major Cephalon investor. In June 1997 she told me that while she didn't think the FDA would approve Myotrophin, she thought the Europeans would. Add in Provigil (which she liked even more than Myotrophin) and she thought Cephalon offered value at $12 a share.
-- Michael Murphy, editor of the California Technology Stock Letter, originally bought Cephalon for his model biotech portfolio at around $11 and bought more at $12 this past April. On March 6, he told readers, "We think the FDA will approve Myotrophin in the next six weeks." On April 3, he assured readers that even if the April meeting of the FDA's advisory panel went poorly, "the FDA would be likely to approve the drug anyway by May 11th based on the new FDA Modernization Act." After the meeting was unexpectedly cancelled, Murphy said he thought this was positive, and he put the odds at 7-to-3 that the FDA would approve by August 11 at the latest. So far, Murphy is down 55% on Cephalon. He recently reiterated his three-year target price of $28.
Some may be more skillful than these experts at analyzing biotechs. Still, I think Cephalon shows that biotech investing is inescapably a guessing game, and one that's easy to lose. After all, you're often forced to guess whether a company even has a marketable product. Of all the challenges you can confront in investing, that's a huge one to start with.
Related articles:
Daily Trouble, 08/01/97: Cephalon Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CEPH)") else Response.Write("(Nasdaq: CEPH)") end if %>
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Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), Fool Two Alex Schay (TMF Nexus6), Fool, too Dale Wettlaufer (TMF Ralegh), Final Fool
Editing |