Medco is a safe bet for investors in cardiac arrest.

With small caps in a funk since February and even blue chips feeling blue, it's tough to find reasonably priced stocks that have shown good gains this year. And one with growth potential? In a hot industry? With stable profits?

Medco Research Inc. has all that. It was up 24% through the first eight months of 1998, even after slipping in August. The Research Triangle Park-based drug developer even has two products that've passed Food and Drug Administration muster. That's right, a biotech company that actually sells something.

Yet the stock is cheaper than most of its peers. "That's so frustrating," says Mike Freeman, director of corporate communications. Its P/E ratio is 12. "And these other guys who don't have any products, have a hope and a prayer, have P/Es of 35."

What's the catch? Medco just isn't that sexy. It started in Los Angeles in the late '70s as one of the first contract-research organizations. After licensing rights to the hormone adenosine from the University of Virginia, it started developing its own drugs as a late-stage "virtual company" - contracting out the tests. Adenosine occurs naturally in the body and is not that difficult to make, which is partly why investors don't get too starry-eyed. Other drug companies are trying to use the hormone, which triggers lots of receptors in the body, to treat pulmonary, asthma and anxiety problems.

TAR HEEL STOCK WATCH

Expensive stocks
(highest price-earnings ratios among North Carolina stocks)

                                   P/E      Recent      52-week
Company                           ratio     price        range

RF Micro Devices                 1,387.5    $13.88    $9.75-19.25
Konover Property Trust             334.4      6.69     6.50-10.00
Applied Analytical Industries       71.4     10.00     9.00-23.75
Alydaar Software                    58.3      7.00     5.88-26.75
Coca-Cola Bottling                  41.3     64.00    51.75-75.75
Quintiles Transnational             40.5     37.25    31.00-53.50
Sonic Automotive                    34.6     18.31     9.38-25.50
Fresh Foods                         34.4      9.63     9.50-29.00
Pharmaceutical Product Dev.         34.3     20.25    12.25-25.88
Waste Industries                    31.2     21.50    15.25-27.75

Cheap stocks
(lowest price-earnings ratios among North Carolina stocks)

                                    P/E      Recent     52-week
Company                            ratio     price       range

Standard Commercial                  4.3     $9.00    $8.63-18.19
Fountain Powerboat Industries        7.3      5.63     5.00-15.75
Burlington Industries                7.6      9.81     9.44-18.88
Market America                       7.6      4.13      3.63-8.00
Guilford Mills                       8.1     14.88    14.63-29.63
Kewaunee Scientific                  8.3      9.50     8.63-14.50
Coltec Industries                    8.7     14.75    14.13-26.56
McRae Industries                     9.9      6.63     6.38-10.25
Midway Airlines                     10.0     14.75    13.50-23.00
Old Dominion Freight Line           10.0     13.25    13.25-20.25

But Medco focuses on treating heart disease, and it has patent protection to 2004 and 2015 for its two products, Adenocard and Adenoscan. In this country Medco licenses both to Fujisawa Healthcare Inc., which pays Medco a 25% royalty. Medco bought back some marketing rights in May, hinting it might try going it alone.

Medco moved to North Carolina in 1993 to cut costs. The move had an unexpected benefit - the company hired six of its 22 employees in the shakeout of the merger that created Glaxo Wellcome PLC. But Medco has made missteps. It lost $11.5 million from 1993 through 1995, thanks partly to the expense of developing two non-adenosine drugs - BiDil, to treat congestive heart failure, and ViaScint, to identify bypass candidates. The FDA rejected both, sending the stock in a tailspin to around $8 a share in May 1997.

Not surprisingly, CEO Roger Blevins has chosen to "focus on the bull's eye, as it were." He has hired more adenosine specialists, including Nils Johannesson, who took over R&D in May. He was head of North American R&D consulting for Coopers & Lybrand LLP. The focus has paid off not only for Medco, which made $10.2 million on sales of $20.0 million in 1997, but for Blevins. He moved up from president and COO in February, 18 months after the prior CEO quit following a failed merger. "There was an element of 'Show us that you can turn this company around,'" Blevins says.

Wall Street is starting to think he has. Sales from Adenoscan, rolled out in 1995, have been better than expected. It grossed $36.8 million the first six months of 1998, including Fujisawa's take. The drug speeds up the heart to simulate exercise for testing patients who can't use treadmills. Those sales have helped produce $58 million in cash reserves, so Medco can make purchases without having to dilute shareholder value with a secondary offering. It has used some of its cash to license adenosine research from universities. It is trying to develop drugs to target just one receptor to trigger specific responses or even to act like dimmer switches, turning a receptor up or down.

Medco's best prospect is that adenosine could work on heart-attack victims to reduce heart damage. Large-scale testing on humans should start this year and take two to three years. Till then, stock growth depends on earnings. Analysts predict it will earn $1.22 this year and $1.09 in '99, up from 97 cents last year. Alex Zisson at Hambrecht & Quist LLC has a buy on what he thinks is a good defensive stock.

"It probably couldn't become the next Pfizer," says Sergio Traversa, an analyst with Mehta Partners LLC. But a high upside and marginal downside - low overhead and proven products - means it's relatively safe. "They don't have the high risk of the sector."

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