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Four analysts and top management from eighty-one sector firms examine the healthcare sector in this special 298-page UBS Warburg Healthcare Services Conference issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info486.htm

TWST: Let's move over to the pharmaceutical outsourcing area — the drug distributors and the contract research organizations. Could you give us an overview and some specific companies there?

Mr. Capek: As I mentioned earlier in the provider sector, everything was created to compete with or facilitate the hospital. When one looks at the pharma manufacturing and related sectors, almost everything was created to facilitate the channel — that is, to take the drug or device from the manufacturer to the end-user, or fill some other outsourcing function of the original manufacturer. One of the outsourcing areas that we cover is the contract research organization (CRO) sector. CROs provide value by shortening (by about 15%) the length of time it takes to get a compound from discovery through FDA approval and to market/commercialization. Here, the entire growth rate of the industry is predicated on the large cap pharma and biotech spending on R&D. Over the last 12 years, the average growth rate in R&D spend has been just over 13%. It tends to run in a four- to five-year cycle. The good news is that we're in the second year of a positive spending cycle. In 2001, year-over-year R&D spending growth was about 18%. Although we don't think we're going to reach 18% this year, we should be growing faster than the average, which bodes well for the sector.

Another consideration that we look at is the number of compounds that are in Phase I, II or III of clinical trial/studies. Again, looking at historical growth rates, over the last nine years the average growth rate in compounds in Phase I and II has been 4.5%-5%. For the first time in 2001, there was a sudden bump up and we saw an 11% growth rate in these compounds. Why is that important? Most of the contract research organizations make their living in the larger, important Phase III trials that come right before the compound goes to the FDA for approval. There's usually an 18-month lag time between Phase I and II getting to Phase III. So there is a well-defined precursor to strong growth in late 2002, in our view. It makes sense — if you look at large cap pharma and biotech, everyone is promising blockbuster pipeline stuff in 2004. To get there, these firms can't stop spending on R&D. So the general macro theme is intact, although it is a bit of a cyclical call. The CROs as a group are trading off of their bottom — they're trading at a forward p/e of about 24 times. They bottomed at about 15 times forward earnings a year and a half ago. They’ve gotten as high as 35 times forward p/e. The final check on sector viability, for us, is earnings quality, as measured by operating margins, book-to-bill, and backlog coverage ratios. Each of these measures are improved but still 30% or so away from their highpoints reached in mid-1998. In CRO-land, we have a (relative) big cap idea and a small cap idea that we’d like to talk about, both stock picks partly rooted in the track record of the respective operator. On the small cap side, we cover Icon Plc (Nasdaq:ICLR), with a buy rating. This is an ADR, and I would say that 65%-70% of the volume is traded in the US. ICON is a very focused, best-of-breed company, concentrated (for now) in Phase II and Phase III. They are very good at the process and use of a team management of trials. Why is that good? Mainly because they are not mispricing their business or under-delivering on milestones and time lines. As a result they enjoy a pretty good following within the research community. They have the reputation of getting the job done and not having to go back and ask for more money or an extension on the time of the trial, etc. The stock right now is trading at 29, and it has had a nice run from 22 or 23 over the last four months. We think that, fairly valued on 2002 estimates, this is a 34 or 35 stock.

This special conference issue includes:

1) Outlook for Health Care Services - In an in-depth (4,700 words) Analyst Interview, Howard G. Capek, Executive Director at UBS Warburg, examines the outlook for the sector and shares specific stock recommendations.

2) Healthcare Facilities - In an in-depth (3,300 words) Analyst Interview, Ken Weakley, Executive Director at UBS Warburg, examines the outlook for the sector and shares specific stock recommendations.

3) Managed Care Companies - In an in-depth (3,700 words) Analyst Interview, William S. McKeever, Managing Director in the healthcare services group at UBS Warburg, examines the outlook for the sector and shares specific stock recommendations.

4) Diagnostic Services Companies - In an in-depth (800 words) Analyst Interview, Ricky Goldwasser, Director at UBS Warburg LLC, examines the outlook for the sector and shares specific stock recommendations.

5) CEO interviews (average 2,500 words). Top management of eighty-one sector firms examine the outlook for their firm and the sector.