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Biotech / Medical : MRE (medco research)
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To: Harold V who wrote (98)7/1/1998 9:35:00 PM
From: Xiaoping Zhang  Read Replies (2) of 192
 
Re: Tax Rate.

I looked into the most recent 10Q (3/98) for clues why the past 5 Qs had very low tax rates. I found the reason as I suspected - carryover of the operation losses from previous years and credits for R&D. The next question then is how long the company can enjoy the low tax rates. I have been very busy with my research work and only late in the afternoon on Monday did I had a few minutes to send an E-mail to the company, asking the question. To my pleasant surprise, next day (Thuesday) noon I received an E-mail with a straightforward answer. I present a part of the E-mail below to share with anyone interested in this issue:

"With respect to the tax rate, it remains to be seen what will be spent on adenosine for cardioprotection during the remainder of 1998, but at a constant rate of product sales, and no dramatic change in R&D spending, the company should paying the full rate midway or during the 3rd Q of 1998".

I appreciate the frankness of the company. I pose this information to let everyone know so that no one will get shocked when the EPS number comes short of expectations. Do not get me wrong; I am very bullish on this stock. I just do not want some of the investors/traders to be unprepared and to sale the stock in panic. This company has very sound fundamentals (sales and EPS increase, lots of cash and no debt, a pile line of potential new drugs - especially the MEDR640 that drives everyone's expectations, an effective business model of outsourcing research and manufacturing - now in the transition from a royalty company to a sales-based company). The returning to normal tax rate around 36% is actually a welcome result of the turnaround of the company from being in red to in black.
Even taking into account of the new tax rate, the past 5 Q EPSs are still good enough to consider this company to be undervalued when compared to other biotech or pharmaceutical companies in the same group.
Finally, it looks that this coming Q (6/98) will not pay the full rate.

X.Z.
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