http://dailynews.yahoo.com/h/nm/20010125/bs/americanhomeproducts_earns_dc_5.html
Thursday January 25 12:20 PM ET
AHP Takes Giant $7.5 Billion Charge
NEW YORK (Reuters) - American Home Products Corp. on
Thursday took a much-higher-than-expected $7.5 billion charge to cover
liabilities related to two recalled diet drugs, while also posting a 17 percent
rise in operating earnings for the fourth quarter, meeting Wall Street
forecasts.
The No. 5 U.S. drug maker (NYSE:AHP - news) said it
believed the charge, which was $2.75 billion more than its previous forecast,
would cover all future liabilities to past users of its appetite suppressants
Pondimin (fenfluramine) and Redux (dexfenfluramine) -- once used in the
so-called fen-phen slimming cocktail.
The Madison, N.J., company reported fourth-quarter
earnings from continuing operations of $704.3 million, or 53 cents a share—which
excludes special items such as the fen-phen charge. That compares with
operating earnings of $602.7 million, or 46 cents a share, in the 1999 fourth
quarter.
The performance—which the company said resulted from
strong sales of pharmaceuticals such as its Premarin female hormone replacement
therapy— matched the average 53-cent forecast by analysts polled by First Call/Thomson
Financial.
But AHP reported a net loss of $3.82 billion, including
the charges and special items, compared with a profit of $593 million in the
1999 quarter.
The company said the $7.5 billion fen-phen charge would be
its last and that strong company fundamentals would allow it to meet its
previously stated goal of earnings per share of $2.15 to $2.20 in 2001 --
growth of 13 percent to 15 percent above 2000. American Home shares surged
after the report and were up about 4.6 percent shortly after midday..
“Many analysts were expecting the company to take a charge
for fen-phen of $2.5 to $3 billion in the fourth quarter, so the $7.5 billion
is way above that,” said ING Barings analyst Sergio Traversa.
“It’s a very big number, but it will be worth paying if it
indeed is the last step of the painful fen-phen story. AHP is in good shape financially
and can afford to pay the debt and move ahead,” Traversa said.
Last year, AHP said all future fen-phen charges would
likely not exceed the $4.75 billion in charges it took in the third quarter of
1999 to cover liabilities to an estimated 6 million patients who took the diet
drugs before they were recalled in 1997.
“Although it will cost more than we originally expected,
we believe it is clearly in the best interest of AHP shareholders to resolve
the diet drug litigation quickly,” AHP Chairman and Chief Executive John
Stafford said.
“We are confident that no further charges will be required
and that the strength of our business will enable us to meet earnings targets
and all other business targets despite higher interest costs,” he added.
AHP’s pro forma net revenue rose 15 percent to $3.5
billion in the quarter on stronger worldwide sales of pharmaceuticals,
including Premarin and antidepressant Effexor XR.
But the fen-phen charge was a major distraction in the
otherwise positive earnings report.
Patients typically combined either Pondimin or closely
related Redux with another appetite suppressant called phentermine to make “fen-phen.”
Several hundred of the diet-drug users suffered an
often-fatal condition called primary pulmonary hypertension, in which damage is
done to arteries connecting the lung and the heart.
Many others were diagnosed as having heart-valve
irregularities, particularly leaky heart valves.
AHP has already reached a national settlement with tens of
thousands of U.S. patients who had filed lawsuits against it, alleging they had
not been adequately warned about dangers of the diet drugs.
But an estimated 50,000 other patients had “opted out” of
the settlement, reserving the right to continue their fight against AHP in the
courts.
The company said on Thursday it had already settled with
about 80 percent of the opt-out patients and adding the new charge was
sufficient to settle with those still holding out.
Stafford said ending the fen-phen litigation would allow the
company to focus on its respected pipeline of experimental new drugs and get
its house generally back in order.
ING’s Traversa cautioned that AHP reassured investors last
year that its earlier charge of $4.75 billion would be adequate to cover all
potential liability.
“The company needs to convince Wall Street that, indeed,
this is the end of the fen-phen drama. If they can do that, then AHP is an
attractive company,” he said.
AHP said Thursday that J.P. Morgan had given it an
additional $6 billion credit line, which would allow the company to pay
expected fen-phen litigation payments “during 2001 and beyond” as well as
general company expenses.
AHP shares gained $2.54 to $57.29 shortly after midday on
the New York Stock Exchange (news - web sites), where they had a 52-week high
of $65.25 and a low of $39.875.
The shares had outperformed competitors in 2000, surging
nearly 60 percent.
A handful of new drugs boosting the stock include
pneumococcal vaccine Prevnar, sleeping aid Sonata, ulcer drug Protonix,
hemophilia drug ReFacto and Rapamune, a drug to stop rejection of kidney
transplants.
Meanwhile, the American Stock Exchange Pharmaceutical Index (^DRG - news), which includes rivals Bristol-Myers Squibb Co. and Merck & Co. Inc. (NYSE:MRK - news), climbed about 27 percent in 2000.
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