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Diet Drugs Bite American Home Again

American Home Products (AHP - Get Report) jolted investors Thursday, saying it probably will need to replenish a $3.3 billion reserve fund it set aside to pay off diet-drug litigation claims.

Officials of the Madison, N.J., drugmaker said they couldn't estimate how much they might have to add to reserves, but they told analysts Thursday they expect the sum will amount to "significantly less" than $5 billion. Barbara Ryan, an analyst with Deutsche Banc Alex. Brown, said it's possible that the additional charges could be around $3 billion, though she said it was too early to tell.

"The timing and magnitude are a little surprising," says Ryan, who has a buy rating on the stock and whose firm does no underwriting for American Home, the maker of Advil and other consumer products. "We thought it was capped out, but now [the company's liability] goes from being capped out to being open-ended."

American Home shares fell 1 11/16, or 3%, to close at 53 9/16 Thursday.

American Home last year took a charge of $4.7 billion to compensate several hundred thousand class-action claimants who used Pondimin or Redux, two diet drugs that were withdrawn in 1997 after reports of heart-valve problems.

In May, the company reached a settlement with the class-action claimants, an agreement that is expected to be approved by U.S. District Court Judge Louis C. Bechtle in Philadelphia later this summer. But about 45,000 people opted out of the settlement and sought individual settlements with the company. Company officials told analysts Thursday that they had paid about $1.5 billion to settle claims and pay legal fees so far.

Optimism about the pending settlement boosted American Home's stock from a low of 36 1/2 late last December, as it appeared that the company was finally going to limit the charges and move on with its main business of drug development.

But last month, an Oregon jury awarded $29.1 million in damages to two former users of the diet drugs, prompting questions about whether the company would be forced to boost its reserve fund to pay claimants. Company officials told analysts on a conference call Thursday that 30 to 50 additional cases have been brought to trial in various courts.

Company officials said they "remain with our earnings target," in spite of the additional charges that could be required, and American Home said it didn't expect the possible reserve addition to reduce spending on new products, capital expeditures or dividends. American Home forecast it would earn $1.90 a share from continuing operations, excluding charges, for 2000, and in the "midteens on top of that in 2001," in terms of percentage growth.

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