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Leading analyst examines the Specialty Pharmaceuticals in this special issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info364.htm

TWST: How has all this news translated into the performance of the stocks over the past six months?

Mr. Sanderson: The mid-sized pharmaceutical companies have performed very well. The overall specialty pharma index is down 8% year to date, at least our group of companies, and that compares to the pharmaceutical index down 14% and the biotech index down 26%. But it has been differentiated. The mid-sized companies have been down right around 9% through the first quarter, and the smaller companies in our group have been down about 20%. A handful of companies in the mid-cap, specialty pharma sector are being viewed increasingly as good alternatives to the larger pharmaceutical companies because they have very good near-term earnings visibility, good new product dynamics and are just beginning to show operating margin expansion from leveraging their sales and marketing infrastructure. The more technology-driven companies, like the drug delivery companies, have traded more in line with the biotech index. These are longer-term stories that for the most part don’t have the earnings to really buttress the valuations in the near term and these have underperformed. The generic drug stocks have underperformed as well, going into this year, because they were such strong performers last year. I think the evidence is out there that generic drug pricing is a little bit tougher than people expected last year.

TWST: And of course the pharmacy chains have also consolidated.

Mr. Sanderson: Exactly, yes.

TWST: What’s the outlook going forward? What are the issues that investors should be watching as we go through 2001? Are there any industry-wide concerns?

Mr. Sanderson: I think a major issue that can make the mid- and small cap pharmaceuticals volatile is FDA approval times. New drug dynamics are probably the single most important factor to stock performance for all of these stocks and for the last six years, we have had fairly good visibility on FDA approval timing. Under the User Fee Act, the FDA has generally approved products within 12 months of the filing. In the last six to nine months, the FDA has slowed down and become more conservative. They’ve required more data from these companies. More frequently they’re issuing approvable letters rather than final approval letters at the 12-month deadline in order to buy themselves another six months, and often they’re requesting a lot of additional data. So looking forward, we are more than likely to see some disappointments in approval timing of the FDA.

TWST: Do you like Alkermes (Nasdaq:ALKS) and Enzon (Nasdaq:ENZN) partly for their novel technologies?

Mr. Sanderson: Yes. In the near term, Enzon is a single product story based on the pegylated form of alpha interferon for Hepatitis C. This is the new gold standard of treatment for Hepatitis C, and given that there have been a lot of patients who had been foregoing treatment with the older version in anticipation of this new therapy, we expect very rapid market uptake for pegylated interferon when it is launched in combination with Ribavirin likely in August or September. Enzon is also earnings positive just based on development fees and early product royalties on PEG-Intron, so beyond a technology play it is an accelerating earnings growth story, as well.

This special issue includes:

Specialty Pharmaceuticals - In an in-depth (3,900 words) Analyst Interview, Ian Sanderson, Managing Director at SG Cowen, examines the outlook for the sector and shares specific stock recommendations.