MondayMorning

TOP STORIES

It's Official: J&J to Buy Scios. Rumors of merger talks culminated in the announcement last week that Johnson & Johnson (New Brunswick NJ) agreed to acquire biotech company Scios Inc. (Sunnyvale CA) for about $2.4 billion in cash, giving J&J a new congestive heart drug and rights to Scios' experimental arthritis medicine. Under the agreement, J&J would pay $45 a share for Scios, a 23-year-old company, in a transaction that is expected to close next quarter. Scios' big product is Natrecor, a heart failure drug. Scios also has an experimental oral treatment for rheumatoid arthritis that could compete with injectable treatments such as Amgen Inc.'s (Thousand Oaks CA) Enbrel and J&J's Remicade. Analysts said both clinical areas mesh well with existing J&J franchises, and the companies said the drugs' potential is greater in J&J's hands due in part to its huge sales force. The deal represents nearly a 7% premium to the price of Scios' stock before announcement of the deal. Scios had been trading in the low $30s but soared more than 20% the week prior after a Wall Street Journal article reported the two companies were in merger talks.

Hypertension Report Fuels Debate. A backlash is brewing among physicians against a recent government-sponsored clinical trial that found diuretics to be the best, first option for treating high blood pressure. Critics say the results from the 10-year study, published Dec. 18 in the Journal of the American Medical Association to wide publicity, overstated the case for diuretics and contradict much of their own clinical experience with the pills, which are an older, generally cheaper hypertension treatment. Those critics are getting some substantial backing in a new report, published last Thursday in the New England Journal of Medicine. The study suggests that newer drugs called ACE inhibitors are a better first choice for elderly patients, leading to fewer deaths, heart attacks, strokes and other cardiovascular problems. The new study is unlikely to end the debate, however - partly because of differences in the two studies, but also because the question is complex: many patients need two or three dugs to control hypertension.

Aetna Swings to Profit on Cost-Cutting. Aetna Inc. (Hartford CT), the No. 2 U.S. health insurer, said it swung to a fourth-quarter profit as it cut costs and raised premiums to shake off unprofitable customers. Aetna posted a net profit of $98.2 million, or 63 cents a share, compared with a loss of $187.6 million, or $1.30, a year ago. Revenue declined 22% to $4.72 billion as the company shed customers for whom it had to pay more in claims than it received in premiums. Aetna is in the midst of a turnaround after a series of missteps that included cutting premiums too much and posting losses in 2001. The company recovered in 2002 after slashing jobs and dropping millions of members. Aetna said that excluding one-time charges, gains and funds previously put aside to cover claims, it earned 77 cents a share. That bested Wall Street's expectations for the company to earn 59 cents per share.

Medical Stock Spotlight: Stocks took it mostly on the chin again, led by Kendle International Inc. (Nasdaq), falling $2.34, or 31% for the week, to $5.21. The company, which conducts research on behalf of drug companies, reported a loss of $58.4 million, or $4.56 per share for the fourth quarter, compared with a profit of $1.9 million, or 15 cents per share, a year ago. Kendle's revenue from services to drugmakers and biotech companies fell 15% to $36.6 million. Elsewhere, SangStat Medical Corp. (Nasdaq) skidded $2.67, or 25%, to $7.83. Th e maker of organ transplant drugs reported lower-than-expected Q4 profits and said 2003 results will also fall short. And Universal Health Services Inc. (NYSE) plunged $8.90, or 20%, to $34.99. The hospital operator fired its well-regarded CFO, Kirk Gorman, due to his disagreement with company auditors. The move placed a cloud over the company's financial statements.

Medicare Panel Backs More Defibrillator Use. A Medicare panel of outside experts last week unanimously endorsed use of heart defibrillators for a wider population, making it likely that coverage will expand beyond just those patients who have had life-threatening irregular heart beats. The positive recommendation represents not only a major victory for Guidant Corp. (Indianapolis), which requested the coverage, but also for rivals Medtronic Inc. (Minneapolis) and St. Jude Medical Inc. (St. Paul). The medical device companies hope Medicare coverage will drive a doubling of demand for the devices, called implantable cardiac defibrillators, or ICDs, as many private insurers will follow Medicare's lead. ICDs, which cost between $20,000 and $25,000, are projected to have $2.2 billion in sales by the end of this year. ICDs are designed to detect abnormal heartbeats and shock the heart back to a normal rhythm.

Tracking Government: Physicians could see over $50 billion in additional Medicare payments over the next decade under an agreement added to an omnibus spending bill which passed Congress on Thursday. As soon as the appropriations bill is signed into law by President Bush, Medicare is expected to announce that physician fees for the remainder of 2003 will increase by 1.6%, canceling a plan to slash fees by 4.4% in 2003 and compound large losses experienced by Medicare physicians in 2002. The cuts were mandated as part of the 1997 budget balancing deal, but the American Medical Association and other industry groups have since argued that the formulas used to calculate those payment reductions have been erroneously harsh. House Ways and Means Chairman Bill Thomas (R-CA) had sought unsuccessfully to add a similar provision to legislation extending unemployment benefits in November.

CORPORATE

Glaxo, Pharmacia Sued Over Pricing. The state of New York is suing Pharmacia Corp. (Peapack NJ) and the U.K.'s GlaxoSmithKline Plc, alleging that the drugmakers concocted illegal schemes to inflate the price of prescription drugs for consumers and government health plans to increase their share of the market. New York Attorney General Eliot Spitzer filed suit against the two companies, charging them with consumer fraud, commercial bribery and making false statements to government health plans. The suit alleges that the drugmakers encouraged the use of their products by offering doctors and pharmacies major discounts from reported prices, thereby allowing doctors to pocket the difference in reimbursements they received from Medicare and Medicaid.

Feds Probe Wyeth, Schering. The Justice Department is probing whether Wyeth (Madison NJ) colluded with Schering-Plough Corp. (Kenilworth NJ) to cut fees paid to a broker that supplied over-the-counter medicines to niche markets, including offshore oil rigs. Wyeth disclosed the probe in a prospectus for bonds filed with the Securities and Exchange Commission. Wyeth said it expects the Justice Department's antitrust division to refer the matter to a grand jury. The probe concerns a simultaneous cut in commissions paid by Wyeth and Schering to a broker identified by the Washington Times as Compass Marketing, of Sykesville, MD.

TENET HEALTHCARE CORP. (Santa Barbara) said five of its hospital subsidiaries in South Florida agreed to pay $4.15 million plus interest to settle a dispute with the government over alleged improper billing. The settlement does not resolve the government's lawsuit that was announced Jan. 9 against Tenet's hospitals over coding for Medicare reimbursement. The latter suit, which excludes the five Florida hospitals, was filed after discussions between the No. 2 U.S. hospital operator and the U.S. Department of Justice.

ABBOTT LABORATORIES INC. (Abbott Park IL) last week scrapped a clinical trial of its new drug for prostate cancer because the drug failed to halt progression of the disease in its most advanced stage. But the healthcare products maker said it has not given up on the drug, called Atrasentan, because it did impede the development of bone pain in advanced prostate cancer patients.

MAXXIM MEDICAL INC. (Waltham MA), a maker of specialty medical products such as non-latex gloves and custom procedure trays, has sought Chapter 11 bankruptcy protection. Maxxim and 7 affiliates filed for protection after analysts said it would struggle to generate enough cash to meet its obligations. Maxxim listed more than $100 million of assets and more than $100 million of liabilities.

OSI PHARMACEUTICALS INC. (Melville NY), which specializes in developing cancer therapies, said it has agreed to purchase pharmaceutical firm Cell Pathways Inc. (Horsham PA) for about $32 million in stock. OSI said the deal will help it establish a commercial presence and expand its oncology development program. OSI will exchange 0.0567 share of its stock, or about 80 cents per share, for every share of Cell Pathways. The exchange would reflect a premium of about 58% over Cell Pathway's closing price.

FDA ROUNDUP:. Pfizer Inc. (New York) received approval to market its blockbuster depression medicine Zoloft for additional use as both a short- and long-term treatment for "social anxiety disorder." People with the disorder, sometimes called "social phobia," often fear public speaking, acting in plays, playing musical instruments in public and eating in front of others. Pfizer said Zoloft is one of the first in its popular class of depression drugs, known as selective serotonin reuptake inhibitors, to win approval for long-term treatment of patients with the anxiety disorder. Elsewhere in a related move, Wyeth (Madison NJ) was cleared to market its hot-selling depression drug Effexor XR for short-term treatment of social anxiety disorder. Effexor works by raising levels of brain chemicals serotonin and norepinephrine. GlaxoSmithKline Plc's depression pill Paxil is also approved for short-term treatment of the condition.

WALL ST./FINANCE

Markets: After strangling Wall Street for weeks, worries about war with Iraq actually sparked a rally Friday with stocks rising for the first time in four sessions and claiming their first winning week in five. In a highly anticipated speech, top U.N. weapons inspector Hans Blix offered a mixed picture on Iraq that provided fuel to both hawks and doves on the Security Council facing a decision on war with Baghdad over banned weapons. But traders were skeptical of the gains, saying stocks bounced after hitting 4-month lows earlier in the week. And tension still hung thick over Wall Street ahead of a long holiday weekend with Americans on heightened alert for possible terror attacks. The Dow Jones industrial average closed the anxiety-ridden week with a gain of 44.57 points, or 2.1%, at 7,908.80.

Financing: Omnicare Inc. (Covington KY), a provider of pharmacy services to long-term care institutions, filed with the SEC to sell over time up to $850 million of preferred stock, depositary shares, debt securities, warrants and purchase contracts. Omnicare plans to use proceeds to refinance debt, boost working capital, and for capital expenditures, acquisitions, repurchases and redemptions of securities, and other corporate purposes. Under such a filing, a company may periodically sell securities in one or more offerings in amounts, at prices and on terms determined at the time of sale. Omnicare shares closed the week down $1.05 at $23.78. Shares have traded in a 52-week range of $17.56 to $28.83.

Weekly Money Rates in percent	2/14/03	Prev. Week	Year Ago
PRIME RATE:	4.25	4.25	4.75
DISCOUNT RATE:	0.75	0.75	1.50
10-YR. TREAS. NOTE	3.96	3.94	4.86
30-YR. TREAS. BOND	4.88	4.81	5.37
TELEPHONE BONDS	6.09	6.00	7.44
MUNICIPAL BONDS	5.10	5.06	5.28

Sources: Salomon Smith Barney; Telerate

Certificates of Deposit

COM. PAPER: 30 days	1.25
Primary Offerings by NYC banks:
One month	1.00
Three months	0.95
Six months	0.97
Secondary Market Offerings:
One month	1.21
Three months	1.21
Six months	1.21

Source: Dow Jones Markets

RESEARCH & TECHNOLOGY

Heart failure patients given beta-blocker drugs do not face undue risks in the initial stages of treatment as previously feared, according to a drug company-funded study. The study of 2,289 heart failure patients, financed by Roche Holding AG and GlaxoSmithKline Plc, has previously found taking beta blockers reduced patients' risk of death compared to those taking a placebo. Both groups took other drugs commonly prescribed for heart failure. Beta blockers such as Roche's brand Eucardic and GSK's Coreg block receptors for selected stress hormones and are approved for use to treat high blood pressure and heart attacks of varying severity. An FDA advisory panel recommended Coreg for some heart attack survivors but rejected claims that the drug lowered the risk of suffering another heart attack. Source: Journal of the American Medical Association.

The New England Journal of Medicine retracted an article on a heart treatment last week because one author had forged others' signatures on statements attesting they had reviewed the data and the manuscript. The article, published in the Oct. 24 issue, was about using a controlled heart attack to shrink the heart's central wall when it has become so thick and stiff that it keeps blood from flowing easily. This type of heart enlargement has contributed to sudden death in athletes and young people. Neither the journal's editorial nor the authors' retraction letter, both of which were released last Monday and posted at the top of the journal's Web page, said which author was the forger.

EARNINGS ROUNDUP:

PacifiCare Health Systems Inc (Santa Ana CA) swung to a Q4 profit from a year-ago loss on higher premiums and cuts in membership. The managed care firm reported a net profit of $37 million, or $1 per share, versus a loss of $26 million, or 77 cents, last year. Excluding certain items, PacifiCare earned 97 cents per share, topping analysts' estimates by two cents. But Q4 revenues dropped 5% to $2.7 billion, sending share prices plunging $5.75, or 21%, to $21.40. The company is exiting markets too costly to insure. Losses in 2001 stemmed from a failure to accurately price premiums.

IMS Health Inc (Fairfield CT), which provides data on pharmaceutical sales and prescriptions to drug companies, said quarterly operating earnings rose on higher revenue. IMS posted a Q4 net of $78.3 million, or 28 cents per share, compared with $66.8 million, or 22 cents, last year. Results matched analysts' expectations. Revenue rose 12% to $381.9 million.

Caremark Rx Inc (Birmingham AL), a provider of drug benefit services, reported a higher Q4 net income, boosted by its mail-order prescription unit. The company reported net earnings of $574.3 million, or $2.19 per share, versus $57.2 million, or 23 cents per share, a year ago. Earnings included a $520 million benefit from the recognition of a deferred tax asset and a $37.5 million after-tax charge related to discontinued operations. Excluding gains and charges, Caremark posted operating earnings of 35 cents per share, exceeding analysts' EPS estimates of 33 cents. Q4 revenue rose 25% to $1.85 billion.

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