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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: What’s particularly interesting about the pipelines for these companies? First, at American Home Products (NYSE:AHP)

Mr. Shah: Before one reviews the new drug pipeline of a drug company, it must be done in the context of its incremental contribution to the company rather than its absolute contribution. A drug company with an attractive pipeline is not worth as much if it is also facing significant patent expiration problems and sales erosion to generic drug copies. On the other hand, a drug company with only a moderately attractive new drug pipeline is worth much more if the company is not facing a major patent expiration cycle over the next several years. We believe that American Home Products has only a moderately attractive pipeline, but due to lack of major patent expirations facing the company over the next five years, it will make a significant contribution to the company. Although American Home is a far better research-driven company than it was 10 years ago, it is still nowhere close to industry leaders such as Pfizer (NYSE:PFE) and Merck (NYSE:MRK). However, due to the lack of major patent expirations, the continued growth of recently launched newer drugs and their contribution will allow AHP to continue to deliver strong earnings growth.

TWST: And those drugs would include?

Mr. Shah: The major marketed drugs which are significantly contributing to the company’s performance include Effexor, a novel drug to treat depression; two recently launched vaccines, Prevnar and Meningitec; and Premarin. Despite being off-patent, we do not expect any generic competition for Premarin any time soon.

TWST: What does the vaccine business contribute to American Home Products? How important will it be for AHP going forward?

Mr. Shah: AHP is one of the largest manufacturers of vaccines. Its vaccine business has recently risen very sharply due to the launch of two vaccines, Meningitec to treat meningitis and Prevnar to treat pneumococcal infections in children. Although the vaccine business is not as profitable as traditional pharmaceutical products, such as tablets and capsules to treat various chronic diseases, it has many other advantages. Most vaccines have a much longer product life cycle and insignificant price competition. The vaccine business is an oligopoly, primarily dominated by four major drug companies, which are Merck (NYSE:MRK) American Home Products, GlaxoSmithKline (NYSE:GSK) and Aventis (NYSE:AVE). Before the reform of vaccine-related liabilities, the vaccine market was dominated by pediatric vaccines and vaccines to treat hepatitis. However, the market has now significantly expanded to treat and prevent many other diseases and will continue to expand as more vaccines are launched by American Home Products and others. We expect AHP to launch several new vaccines over the next several years, including FluMist, a flu vaccine to be delivered via inhalation device.

TWST: Do you expect to see any of the companies make an effort to develop vaccines to deal with the concerns about bioterrorism? Should they be given incentives to do so?

Mr. Shah: This is a policy issue that involves many factors. Since manufacturing a vaccine is very expensive and capital intensive, there must be some incentives for the drug companies to participate in such a project. Also, most vaccines likely to be developed to fight bioterrorism are likely to be used only in the case of an emergency and may not have recurrent use. Thus, we believe that without significant incentives, drug companies may not be very willing to participate in such projects as they do not offer long-term consistent business prospects.

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.