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It was black fly, black fly everywhere
A-crawlin' in your whiskers, a-crawlin' in your hair
A-swimmin' in the soup, and a-swimmin in the tea
Oh the devil take the black fly and let me be
The Black Fly Song" Hemsworth Wade
TORONTO (GlobeinvestorGOLD) Ah, the Canadian summer! Hordes of people making the weekend trek to the sylvan haunts of what Toronto folks like to call "up North" by the way, folks, up North doesn't even start until you've hit Temagami, and that's still well south of '49, not to mention well south of a big whack of Michigan. Anyway, all the city folk will head up to Muskoka with their SUV's crammed full of citronella candles, mosquito coils, Costco-sized containers of Skin So Soft, citronella-impregnated clothing, and those useless electronic bug-zappers.
Take it from an old bush unit none of that stuff works worth beans. Oh, it may discourage a handful of your effete, etiolated Muskoka mosquitoes, but where I come from the bugs are so bad that the moose run out of the woods to throw themselves in front of semi-trucks just to put themselves out of their misery. In my youth, I spent many a day sweating in the bush, with clouds of black flies swarming about my head and rivulets of blood trickling down behind my ears where the buggers had been gnawing away at me. Mind you, inhaling the little insects when they swarm up into your face is even worse.
The only effective prophylactic against the onslaught of this northern insect plague is good old Muskol or OFF!, with the active ingredient Di-ethyl Ethyl Toluene (DEET). Oddly enough, it's also quite effective as a paint remover. Slather yourself in Muskol, the strongest bug repellent known to man, and you can actually spend time in the bush in the summer without going insane.
Admittedly, the stuff leaves a rather nasty industrial aftertaste when it invariably gets in your mouth that toxic tang of toluene and it burns like the dickens if you get it in your eyes or in a scratch or cut, but since the alternative is slowly being eaten alive by black flies, I say pass me the goop. You get used to it you even get to like it.
In my Wawa prospecting days, we could always tell the women in the local bar who were in town for some R&R from a tree-planting or exploration crew by the redolent essence of Muskol that wafted come-hither from them like pheromones. Proust may have used the scent of his Madeleines to stir his memory, but then, he's never been North of Superior.
Since this is the Summer Edition of Trade by Numbers, I thought I'd examine the investment potential of the makers of mosquito and black fly repellent. It's the essential Canadian summer product: it's gotta be a goldmine for whoever makes it.
OFF!, the "Deep Woods" kind as well as all its many permutations, is made by the SC Johnson Company, which is owned and operated by the SC Johnson family of Racine, Wisconsin. It describes itself as "a family company," with $5-billion (U.S.) in revenue, 12,000 employees, and sales in 110 countries around the world. Great company, but you can't buy the stock, which is a shame. There's only one way to participate: you'll have to marry a Johnson. They also make insect repellents based on picaridin, which is as good as the DEET in OFF! and Muskol at keeping mosquitoes and black flies off, also repels ticks, and won't strip paint. It is not yet sold in the U.S., but SC Johnson sells it widely in Europe and other countries. It is recommended by the World Health Organization, and the US Centers for Disease Control rates it as effective as DEET, but much more pleasant to use.
Muskol, on the other hand, is a fine product of Schering Canada, the domestic arm of pharma-giant Schering-Plough. Who knew?
Schering-Plough is listed on the New York Stock Exchange (currently around $20 a share, and down about 5 per cent year-to-date). It has 30,000 employees worldwide and, in the company's own words, "discovers, and develops, manufactures and markets advanced drug therapies to meet important medical needs." Well, keeping me from being drained by boreal bloodsuckers is definitely an important medical need!
In 2004, Schering generated $8.3-billion in sales, spent $1.6-billion on research and development, and lost $856-million. It has a choppy dividend history and currently pays 5.5 cents a quarter, 22 cents a year. Its biggest selling drug is Remicade, used to treat Crohn's disease, rheumatoid arthritis, psoriatic arthritis and ankylosing spondylitis. Remicade (generically, infliximab) is, for any science geeks in the audience, a monoclonal antibody that specifically targets and irreversibly binds to TNF-alpha, (tumor necrosis factor), which has been shown to play a role in that list of nasty diseases in the previous sentence. Over 634,000 people around the world take Remicade. The company has recently released the results from two Phase III clinical trials that showed the drug may also be effective in treating ulcerative colitis.
Schering's research encompasses allergic and inflammatory disorders, infectious diseases and inflammation, cancer and cardiovascular disease. They also make consumer products such as Bain de Soleil, Coppertone, Tinactin, Coricidin cough remedies, Dr. Scholls, and have an animal pharmaceutical division that makes medicines for livestock, poultry, pets, and even farmed salmon (an anti-parasitic drug to combat sea lice infestations). They used to own Maybelline cosmetics, too, but sold the division to Wasserstein Perella Group in 1990.
Schering goes back to the nineteenth century, getting its start in 1894 exporting diphtheria vaccine from Berlin to the United States. It set up a branch in New York in 1929. When the U.S. entered the Second World War, Schering's U.S. assets were seized by the Alien Property Custodian, which appointed a government lawyer named Francis Cabell Brown to run it. He recruited pharmacists, researchers, doctors and sales staff, and in a decade had quadrupled profits, tripled sales, and received 42 new drug patents.
Meanwhile, in Memphis, back in 1908, sixteen-year-old Abe Plough borrowed $125 from his father, and made up a batch of "antiseptic healing oil," a mixture of cottonseed oil, camphor and carbolic acid, that he then sold to drugstores. In 1915 he bought the inventory of the bankrupt Memphis Drug Company 5,000 cases of "Chill Tonic Oxidine," a patent-medicine "cure" for chills, fever and malaria for $900 and sold it in Louisiana and Texas for $34,000. In 1920, he bought the St. Joseph Company, an aspirin manufacturer in Chattanooga. Rather than compete head to head against giants like Bayer, he formulated Children's Aspirin and never looked back, going on to acquire 27 other companies. He used to spend 25-per-cent of sales on advertising, and was so impressed with how well radio ads worked that he bought a bunch of stations. In 1971, Plough merged with Schering, and Abe Plough stayed on as chairman until he retired in 1976. He remained as Honorary Chairman until his death in 1984.
The pharmaceutical business is a tough game. You're only as good as your next big drug, and Schering-Plough has an admirable history of finding big-selling drugs. They scored big in the 1960s with the arthritis drug Meticorten. When competitors outstripped them in that area, they came up with Garamycin, a broad spectrum antibiotic that carried the company through the 1970s. In the 80s, they came up with a couple of winning asthma drugs, Proventil and Theo-Dur (by acquiring Key Pharmacuticals), and two time-release heart medications, K-Dur and Nitro-Dur.
Nowadays, their website lists a host of pharmaceutical products, including Claritin, Levitra (a Viagra competitor), a brain tumour treatment, and a whole medicine cabinet full of other drugs.
It's a great company, with an interesting history, but how does it stack up as an investment? I've never been much of a fan of big pharma. I admit I don't understand much of the science involved, and I don't like the way the stocks behave, shooting up when companies announce a new drug is in Phase I clinical trials, only to tank when the market finally realizes that there is still Phase II, Phase III, and then regulatory approval to get through, and thus, that it will be years before the new drug generates even a dollar of revenue. And that assumes that the new drug doesn't have any nasty side-effects, like causing people to grow antlers or, as we've seen recently with COX-2 inhibitors like Vioxx (Merck) and Celebrex (Pfizer), even die.
So, while a successful drug can make billions, there are a lot of pitfalls on the way to profitability. On the plus side, demographics is working for the pharma companies, with the baby boom cohort getting to the age when it needs a lot of pharmaceutical products. That's one reason why pharmaceutical companies are focused so heavily on drugs like Levitra. Boomers' desire to shake their moneymakers well into their golden years is proving to be a golden moneymaker for the drug companies.
And once the U.S. approves SC Johnson's Picaridin, it will likely steal major market share from DEET repellents like Muskol. That shouldn't hurt Schering-Plough's bottom line much they've got lots of other products. But, alas, it doesn't make them a particularly good way to play the bug juice market.
Still, the company is well run, has a long, successful track record, and could well be a solid addition to a portfolio for an investor looking for drug company exposure. That's not me at the moment, however, but I'll be adding Schering-Plough to my stock monitor. It's worth watching.
Harry Koza is Senior Analyst in Canadian markets for Thomson Financial/IFR. At various times in his career, Mr. Koza has been a prospector, metallurgist, project manager, engineer, as well as an institutional bond salesman for 15 years. His current area of expertise is in high-yield distressed securities and corporate bonds in general.