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Items from Valueline's site
Items from Valueline's site:
December 8, 2000
ECONOMIC AND STOCK MARKET COMMENTARY
Economic growth is continuing to moderate. Evidence of this can be found in
surveys showing modest declines in sales of existing homes and in consumer
confidence levels, as well as a further deceleration in the rate of personal
spending. These trends suggest that the economy, which grew by just 2.4% in
the third quarter, will expand by less than 3% in the current period, as
The inflation story is mixed as we head into the final weeks of 2000. Most
of the trends observed in recent months, including data for prices of
industrial goods, continue to show modest increases, at most. At the same
time, labor markets remain tight and energy prices are down only modestly
from their earlier highs. In all, we think it is still too early to declare
victory in the inflation war.
Profit trends are mixed as well. Here, too, we are seeing sufficient
conflicting data in the form of slowing growth in portions of the tech
sector, declining earnings in certain old-line industries (such as basic
chemicals and steel), and further solid growth in the health care area.
Overall, we still believe that earnings will be higher in the current
quarter and in 2001. The projected rates of growth, however, will be below
those of recent years.
The moderation in GDP growth, inflation, and profit improvement strengthens
the case for an easier monetary policy down the road. As such, we now
believe that if things stay the way they are, or slow further, the Federal
Reserve will cut interest rates during the first quarter of 2001. Indeed, if
growth falls below current levels for any length of time, it is possible
that we would see a series of rate reductions next year.
Meanwhile, investors continue to be edgy. In part, their reluctance to
assume a bullish posture is the result of uncertainty with respect to
profits, the economy, and interest rates. Also hurting investor sentiment is
the recent election, which had yet to be resolved as we went to press. But
this latter uncertainty, too, shall pass, and with the market having fallen
sharply recently, in particular the NASDAQ, stocks are now priced at levels
at which they are once more attractive.
Our asset allocation model has become more positive about the outlook for
equities. As such, we now advise placing 70%-80% of your portfolio in stocks
ranked 1 or 2 for Timeliness and apportioning the remainder in cash reserves
and Treasuries. As always, investors should take into account the length of
their investment horizon as well as tax considerations in making their
Alza: Stock Highlight
Founded in 1968, ALZA Corp. (AZA is a mid-sized pharmaceutical firm with
leading drug delivery technologies. The company applies its delivery
technologies to develop drugs with enhanced therapeutic value for its own
portfolio and for a number of the world's leading pharmaceutical companies.
ALZA's sales and marketing efforts are currently focused on urology,
oncology, and central nervous system disorders.
These shares have risen sharply this year, partly reflecting, we think, the
market's optimism surrounding ALZA's drug-development pipeline. And for the
coming six to 12 months, this equity is ranked 1 (Highest) for Timeliness,
indicating the probability it will outperform the broader market averages in
this time. Although ALZA stock has subpar 3- to 5-year appreciation
potential, a major acquisition or positive developments on the R&D front
could enhance prospects. (All per share data are adjusted for the 2-for-1
split distributed November 15th.)
Promising New Drugs
Last year, the company launched the much-anticipated Ditropan XL, used to
treat patients with an overactive bladder. The pharmaceutical has been well
accepted, bringing in revenues of about $87 million in 1999-an amount that
was some $20 million better than what management anticipated. Assuming a
continued high incidence of urge incontinence ailment in humans, we expect
sales of Ditropan XL to jump to $150 million annually in the coming years.
Last March, the FDA approved Viadur for the palliative treatment of advanced
prostate cancer. The titanium implant administers continuous, 12-month
testosterone suppression with one treatment, which is more convenient than
traditional therapies. Given that the market for prostate cancer drugs has
tremendous growth potential (in the United States alone, an estimated one in
eight men may suffer from this condition), we look for annual sales of
Viadur to surpass $50 million going forward.
ALZA recently got approval for Concerta, a drug used to treat people with
attention deficit hyperactivity disorder (ADHD). The drug is revolutionary
in that it provides medication once a day, compared to other remedies, which
may require the administering of two or more doses daily. This treatment
advance has been well received by the $630 million ADHD market, with sales
possibly reaching $200 million annually over time. The addition of Concerta
has also brought ALZA into a new medical arena, central nervous system
disorders, which appears to offer excellent sales opportunities.
Sales of ALZA-marketed products have exhibited strong growth over the years,
attributable, in part, to a highly skilled sales force, and we expect the
rapid sales climb to continue. Another of the company's strengths is its
profitable marketing alliances with many top-flight pharmaceutical
companies, such as Smith-Kline Beecham. The addition of new partners in the
coming years should continue to augment earnings. Lastly, ALZA, which is
generating excess cash, has the financial capacity to grow via acquisitions.
Given ALZA's current configuration, we expect share-net to increase by an
average of about 20% annually to 2003-2005.
In all, ALZA is a successful company with a bright future. Still, in the
pharmaceutical business there is the potential for pitfalls, since the field
of drug-development is dependent on getting government approval for new
drugs and dealing with subsequent federal regulation and perhaps the risk of
Frederick L. Harris, III