(FORTUNE Magazine) – AMONG CONSUMERS, Carter-Wallace is best known for such products as Arrid antiperspirants, Nair hair remover, and Trojan condoms. But investors seem more interested in the company's drug and health care division, a medicine cabinet crammed with such products as Miltown tranquilizers, Organidin cough syrups, and diagnostic kits that check for herpes and Lyme disease. Says security analyst Edward B. Keaney, who covers the industry for Stifel Nicolaus in St. Louis: ''These aren't terribly glamorous drugs, but they don't have to be. A lot more people get colds than AIDS.'' The New York City company has been a model of ever better health for each of the past 16 years. Profits rose 11% to $50.3 million for the fiscal year ended in March on total sales of $551.1 million. The consumer division earned an operating profit of $36.5 million and health care $62.2 million, increases of 16% and 1.5%, respectively. This seemingly low increase in health care earnings reflects Carter- Wallace's new investment in research and development and a change in strategy. In the past, R&D expenses were minimal compared with those at drug powerhouses like Merck or Upjohn. But Carter-Wallace spent $45.3 million on R& D in fiscal 1990, a 20% rise over 1989, and will increase that another 20% in 1991. This means that the company is now investing about 17% of health care sales in R&D, well above the industry average of 14%. Carter-Wallace is increasing R&D spending to move into drugs that are potentially much more profitable. Two are already undergoing Food and Drug Administration trials: Felbamate, which is designed to treat severe epilepsy, and Azelastine, for asthma relief. Also being tested, or rather retested, is Bepridil, a cardiovascular drug. Carter-Wallace previously tested the drug as a way to treat arrhythmia but halted trials in 1986 after it was linked with several deaths. This time it is submitting the drug to treat a different cardiovascular problem, angina. If the FDA approves Bepridil, Johnson & Johnson will help Carter-Wallace sell it. Analyst Keaney thinks the drug could be worth $100 million in annual sales in the $4-billion-a-year cardiovascular drug market. More drugs may be in the pipeline soon. Meanwhile, Carter-Wallace's consumer products are maintaining market share against big competitors through line extensions, aggressive discounting, and acquisitions -- usually at bargain prices. The company paid $14.8 million for American Cyanamid's Lady's Choice deodorant line earlier this year, for example. This brought the market share for Arrid and the rest of the company's deodorant business up to nearly 12%, from 10%. Last year Carter-Wallace paid $25 million for Tambrands's First Response home pregnancy test kit line, adding it to its own Answer. Answer was No. 5, but the purchase gives Carter- Wallace a 31% market share, making it No. 1 in this category. Says Diana K. Temple, an analyst at Salomon Brothers: ''The company has achieved excellent return from its acquisitions.'' Carter-Wallace has also bought its way into entirely new product lines, again paying pinchpenny prices. Temple cites the $25 million paid to Youngs Drug Products for Trojans in 1985. The brand now posts $20 million a year in operating income. In 1988 Carter-Wallace bought Mentor's condom business, which with Trojans and other brands, gives it about 62% of a market that is growing at 8% annually because of the AIDS scourge. Above all, cost control is the doctor's order at Carter-Wallace. Typically the annual report has no photographs, using a single color to relieve the black type. The color always represents an Ivy League school. The 1990 issue is Princeton orange, the alma mater of CEO Henry H. Hoyt Jr. No splashy, or pricey, consumer product launches either for this tightfisted lot. The Hoyt family controls 51% of the shares, as well as some of the top jobs: Hoyt's brother, Charles, is chairman of the executive committee. Charles's son Scott is vice president of market development in the consumer products group. But don't let any of that turn you away. Both Keaney and Temple point out that Carter-Wallace is in two recession-proof businesses, consumer goods and drugs. They recommend the stock, saying that it is undervalued because the company avoids publicity and declines to meet with security analysts or the media. Temple expects fiscal 1991 earnings and sales to rise 8% and 10%, respectively. Shares traded recently at $51.50, more than 14 times Temple's estimated earnings per share. Pharmaceutical and consumer drug companies trade up to a multiple of 17.

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