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Leading analyst examines the Health Care and Pharmaceuticals sector in this special Outlook for Health Care & Pharmaceuticals report from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info462.htm.

TWST: You said earlier that the managed care companies had managed to do fairly well because of the premium increases they had received. What’s your thinking about managed care as we move into 2002? If we’re in a recession, will the HMOs be able to get price increases?

Mr. Shah: We believe that during 2002, managed care may not do as well. Rising unemployment, aggressive cost cutting by employers, and greater cost shifting to the employees may not allow managed care to win significant increases in the premiums they charge. Thus, we believe that the performance of most managed care companies during 2002 may not be as solid as in the past couple of years.

TWST: Given the uncertainty in the market and the acknowledgment that we are in a recession, are the healthcare stocks the safe, or relatively safe, haven that they have been regarded as in the past?

Mr. Shah: Traditionally, they should be. But this time it is a little bit different. Prior to a typical recession and with strong economic growth, pharmaceutical stocks tend to underperform the market with their valuations declining significantly despite their ability to deliver consistent earnings growth. The valuations of most pharmaceutical companies remain high going into the recession and at the same time, more and more drug companies are unable to deliver strong double-digit consistent earnings growth. Thus, we believe that despite a probable economic slowdown, the drug stocks are likely to underperform the market during 2002.

TWST: What’s your thinking about the valuations at which the pharmaceuticals are trading currently?

Mr. Shah: The current valuation is not as high as it was at the beginning of this year and late last year; however, given the uncertainty about the ability of these companies to deliver expected double-digit earnings growth, we believe that it is not low enough to make them a very attractive investment. The issues of patent expirations and political pressure on pricing have not disappeared and may continue to haunt most drug companies. We also believe that earnings expectations will continue to decline during 2002, further pressuring the performance of drug stocks. We believe that the long-term earnings growth for the industry is likely to be below 10%, which will be well below what most investment professionals expect today. This will further pressure the valuation of most drug stocks.

TWST: Why do you particularly like GlaxoSmithKline (NYSE:GSK)?

Mr. Shah: GlaxoSmith-Kline not only has a very attractive pipeline, but also a relatively insignificant generic exposure. On top of this, most of its recently launched drugs continue to grow rapidly, partly due to market growth and partly due to increased market penetration. Like American Home Products, GlaxoSmithKline is a balanced company and thus offers a very attractive upside to the risk/reward ratio.

TWST: Are there any products in the pipeline that you would highlight?

Mr. Shah: One product that is extremely important for GlaxoSmithKline and is doing quite well is Advair. It is a combination of salmeterol and fluticasone, or a combination of a long acting beta agonist and a potent steroid. This drug was launched in the US several months ago for the treatment of asthma. It has done exceptionally well, and we believe that this drug has the potential to become a blockbuster with a multibillion-dollar market. And if Advair continues at the current pace, almost certainly it will exceed 2-3 billion in global sales over the next three years.

TWST: Are there any areas of worry with GlaxoSmithKline?

Mr. Shah: The major worry is the uncertainty about an unexpected generic competition with one or more of the company’s important drugs. Validity of patents on some of these drugs is being challenged and if GlaxoSmithKline loses one or more of these battles, it may have a major impact on the company’s growth prospects. We believe that the probability of the company losing these battles is very small.

This special report includes:

1) Outlook for Health Care & Pharmaceuticals - In an in-depth (3,600 words) Analyst Interview, Hemant K. Shah, President of HKS & Company, examines the outlook for the sector and shares specific stock recommendations.