Andrx: Is Wall Street Blinded by Love?

The drugmaker faces serious competition--and insider selling

As managing director of Sterling Financial Investment Group Inc., a research boutique in Boca Raton, Fla., Steven C. Kirsch has seen more than his share of dog and pony shows. But when a generic-drugmaker called Andrx Group (ADRX ) gave a presentation at a Bear, Stearns & Co. health-care conference a year ago, Kirsch was stunned. "Andrx management got a standing ovation," recalls Kirsch. "In 20 years on Wall Street, I've never seen anything like it."

The applause has not stopped. Andrx' Nasdaq-traded shares gained 22% in 2001 (chart). Though its shares are down this year because of profit worries, its market cap is a beefy $4 billion because of cheers from a small army of Wall Street analysts. They are most enthused about an undeniable coup: Andrx is the first company to win U.S. Food & Drug Administration approval to make the generic version of the antiulcer medication Prilosec, the world's best-selling prescription drug.

But if a few naysayers, including Sterling and a handful of short-sellers, are right, Andrx is merely a competent but humdrum company that has been overhyped. They claim that the Street is overlooking or underplaying serious negative factors, including potentially devastating competition and management departures accompanied by heavy insider selling. If the bears prove correct, Andrx shareholders are in for some bitter disappointments.

The tussle over Andrx is a prime example of an old issue that has reappeared following Enron Corp.'s (ENE ) downfall: Are brokerage-house analysts likely to gloss over flaws in the companies they cover? It's a troubling question, and there are few cases where the battle lines are drawn more fiercely than that of Andrx.

Much of the disagreement involves Prilosec. The drug, with $4.2 billion in sales in 2000 in the U.S. alone, is manufactured by AstraZeneca PLC (AZN ), the British pharmaceutical giant. According to bullish Street analysts, Andrx sales will benefit richly once patent litigation is resolved. They predict that Andrx stock, now trading at about $64, will rise as high as $115 in coming months because of generic Prilosec and other drugs in the pipeline. Analysts also say that generic Prilosec alone will generate $400 million in sales in its first six months on the market. Among Andrx' champions is Standard & Poor's, which recently named it one of the 35 companies expected to be stellar performers in 2002. (S&P is owned by The McGraw-Hill Companies, publisher of BusinessWeek.)

Of the 18 analysts who follow the company, a few have qualms about the stock's valuation. Only Sterling is outright negative and has put a rare "sell" rating on the stock. "The fact is, we do get a lot of compliments," says Elliot F. Hahn, Andrx' acting CEO.

Andrx management concedes that bringing their generic version of Prilosec to market won't be easy. For one thing, the company is duking it out over patent issues with AstraZeneca in a trial now under way in U.S. District Court in Manhattan. But even Andrx' critics think it will win the court battle. They're worried about a drug called Nexium, which AstraZeneca is marketing as a replacement for Prilosec. Andrx' detractors note that Nexium has already begun to gnaw away at the market share of Prilosec, which AstraZeneca no longer promotes. "AstraZeneca is converting doctors from Prilosec to Nexium and is aiming a big ad campaign at patients," says one short-seller.

That issue is also raised by Robert M. Wasserman, a Sterling analyst who covers Andrx, which is based in Davie, Fla. He is concerned about Nexium and a possible over-the-counter version of Prilosec. "I'm sure that the company will say they'll never go OTC," says Wasserman. "But the other ulcer drugs did just a year or two after they went generic."

Baloney, say Andrx boosters and Hahn. They claim that worries about Nexium and a possible OTC version of Prilosec are overblown and have already been incorporated into their calculations. "Everybody knows Nexium is on the market and gaining share," says Gregory B. Gilbert, who follows Andrx for Merrill Lynch & Co. He does not believe that an OTC version is imminent.

Andrx fans and foes also differ strongly over the departure of the company's two top executives and co-chairmen. Chief Executive Officer Alan P. Cohen left Andrx last year to take over the National Hockey League's Florida Panthers, and Chih-Ming Chen, chief scientific officer, is leaving for what associates call "personal reasons." Cohen and Chen did not return calls to their offices. But in an e-mail to BusinessWeek in response to questions, Cohen observed that it is "time for a change." He added that "money doesn't drive me at this point, and my heart wasn't in it anymore."

Hahn maintains that the departure of the two does not reflect adversely on Andrx' future. He also downplays another factor cited by critics: the recent substantial sales of Andrx stock by Chen and Cohen, including 1 million shares sold by Cohen family partnerships in late October and early November. Cohen's e-mail did not directly comment on his reason for the sales, but it noted that he still owns over $200 million in stock. "I personally believe in the Andrx employees and their pipeline of products waiting approval at the FDA," said Cohen's e-mail.

That remains the dominant view of analysts such as UBS Warburg's Steven Valiquette, who has a "strong buy" on Andrx stock. He admits to some anxiety about "why they would retire ahead of the biggest generic payday in the history of the industry" and is also worried about the stock sell-off. However, Valiquette is not distressed enough about the executive departures to lower his rating--or even share misgivings with UBS clients. In an April, 2001, report, he described Cohen's impending retirement as a neutral factor and said that "we would have a higher level of concern" if Chen were to retire, because of his expertise. But when Chen did indeed depart, Valiquette did not repeat his misgivings.

Such optimism is often justified. But if the bears' predictions come true, Street analysts will have a lot of explaining to do.

By Gary Weiss in New York

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