Nothing to fear

August 1, 2002
Cameron Evans
Pharmaceutical Representative

Including your company's stock in your 401(k).

With the recent collapse of Enron and the finger-pointing going on between its management and its accounting firm Andersen, it's easy to get skittish about putting your hard-earned 401(k) contributions into your own company's stock. Before you begin to stuff those contributions in your mattress or bury them in your backyard, take a deep breath and realize that things are infrequently as bad as they seem. Use the Enron Pandora's box as an opportunity to refocus your 401(k), reallocate assets within your plan and ensure that your 401(k) will not meet the same fate.

If you work for a publicly traded company, and may purchase your company's stock within your 401(k) plan, take the time to become familiar with your company's financial statements. Once you know how to interpret the statements, they will be much less intimidating to you, and much clearer. In the pharmaceutical industry, one of the most important factors in your company's success is the amount of research and development money it is, or is not, spending. Your company's product pipeline and commitment to developing it are what will lead to success. Without cutting-edge products, your company will not set Wall Street on fire. According to analyst Michael Murphy, that R&D spending number should be a minimum of 7% of sales. This is a guideline, though, and is not etched in stone.

Finding new information

Do not rely upon voice mails from your district manager or colleagues telling you that business has never been better. They may do so with conviction, but also may be doing so, unwittingly, without the tangible evidence to support those claims. With the advent of the Internet, there is a wealth of information available to you about your company's stock. You may use a news search to receive articles, directly from wire reports, about your company. You may also easily find out whether the officers of your company are buying or selling your company's stock. Insidertrader.com is a good place to start for that information. Obviously, a spate of selling by those officers should alert you to something amiss. Conversely, if officers are buying or adding to large positions, that should be a fairly good sign.

Be particularly careful if you are privy to "inside" information about your company. If you have information that a new, blockbuster drug will be approved, and buy your company's stock in an account other than your 401(k), you may be inviting a world of trouble. The Securities and Exchange Commission takes a very dim view of insider trading, and the ImClone scandal should serve as a warning. If your 401(k) is set up to purchase your company's stock through wage deferral, is deducting regularly from your paycheck or is dollar cost averaging those shares, you will not be subjected to that scrutiny.

Balance your investments

Asset allocation is the most important factor in achieving superior investment returns. Therefore, having your entire 401(k) contribution go directly toward purchasing your company's stock is not necessarily wrong, provided those contributions are balanced by your spouse's retirement plan assets or your other investments, and your company's stock is suitable for you and falls within your risk tolerance (Note: This is almost never a good idea). Purchasing your company's stock should be, as with any investment, part of your overall investment portfolio, and should be done with a broad understanding of your objectives. It should not be done for you or your colleagues to consider you a "team player." Your financial advisor will help you determine and quantify all those variables.

Ask your financial advisor about his or her experience with pharmaceutical companies. An integral component of your advisor's success or failure is the strength of his or her firm's research department. Some of the larger brokerages may have an analyst devoted solely to your company's stock. Do not let Enron's failure rain on your parade. If your company's stock is a part of your 401(k) portfolio, be aware of your company's financial health, and your financial health should reap the rewards. PR