S&P Downgrades Express Scripts

Express Scripts (ESRX ): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Phillip Seligman

Express Scripts is down sharply on the company's receipt of a subpoena from a U.S. Attorney's Office. The company is not the target of an investigation; the government is seeking information on its relationship with TAP Pharmaceuticals, particularly with respect to TAP's two principal drugs. Express Scripts states it has been in compliance with laws, but notes uncertainty about whether the investigation will lead to an investigation of the company. S&P would hold until uncertainty dissipates.

H&R Block (HRB ): Maintains 5 STARS (buy)

Analyst: Michael Jaffe, Richard O'Reilly

H&R reported a strong finish to the 2002 tax season, with a 10.5% increase in tax preparation fees on a 2.7% increase in clients and 9% higher average fees. It now expects fiscal 2002 (Apr.) earnings per share at the upper end of its $2.20 - $2.30 guidance. Revenue growth for the full fiscal year will be within the target range of 10% - 15%. H&R believes it has increased its share of the overall tax services market and projects fiscal 2003 EPS to increase to the range of $2.60 to $2.75, in line with S&P's $2.65 estimate. Shares are still attractive at 16 times S&P's fiscal 2003 (April) EPS estimate.

Protein Design (PDLI ): Downgrades to 1 STAR (sell) from 3 STARS (hold)

Analyst: Frank DiLorenzo

The resignation of CEO and R&D head is another negative sign. The company reported disappointing results in March for Zenapax as psoriasis treatment, and in December for Remitogen to treat non-Hodgkin's lymphoma and Zamyl to treat acute myeloid leukemia. This greatly reduces Protein Design's prospects vs. its peers. S&P thinks fully human antibodies are the wave of the future, as opposed to Protein Design's humanized technology. The significant market cap premium to Abgenix, Medarex, Myriad Genetics, QLT, Regeneron, and other biotechs with superior prospects is clearly unwarranted, in S&P's view.

Xerox Corp. (XRX ): Maintains 3 STARS (hold)

Analyst: Richard Stice

The debt rating was lowered to B1 from Ba1, with a negative outlook. S&P views the timing as curious. Xerox's financial picture has improved measurably in recent quarters. Cash balance is up $1.9 billion from the first quarter of 2001, and net debt is down 17%. Refinancing of $7 billion in obligations due in the fourth quarter will be completed by June. Settlement with SEC provides further stability. Demand is expected to improve in the second half as product replacement gains traction. Although IT spending remains weak, S&P believes ongoing progress warrants hold.

Walgreen (WAG ): Maintains 4 STARS (accumulate)

Analyst: Joseph Agnese

April sales were in line with S&P's expectations, up 16.5%. Comp-store sales rose 10.6%. Pharmacy performance was strong, with comp sales rising 19.5%, which accounted for 62% of April sales. Non-pharmacy sales declined 1.4% against the prior year that benefited from a later Easter, which was in March this year. Combined April/March non-pharmacy comps were up 4.2%. Gross margin was pressured by increased third party business, and a change in mix to lower-margin pharmacy items. At 37 times S&P's fiscal 2002 (Aug.) EPS estimate of $1.00, S&P sees Walgreen outperforming the market in an improving environment.

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