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Merck Won't Yield on Yield

When the diet-drug lawsuits started, "we didn't have a sense of how much it the cost would be," says Ken Martin, Wyeth's chief financial officer. The diet-drug litigation reserve has since climbed to $21.1 billion.

By the end of 1999, when Wyeth set aside the first reserve of $4.75 billion, Martin says executives "didn't feel comfortable" about the potential impact of lawsuits on the dividend and the company's ability to meet research, development and capital investment goals. "Each year, we had to reassess," he adds.

But Wyeth was aided by strong operating results and some good timing. The company, then known as American Home Products, got a $1.8 billion breakup fee when Pfizer (PFE) outbid it for Warner-Lambert in 2000. Also that year, Wyeth sold its agricultural chemicals business to Germany's BASF (BF) for nearly $4 billion.

A year later, Wyeth benefited when Amgen (AMGN) made a $16 billion bid for the biotechnology firm Immunex, in which Wyeth owned a 41% stake.

"If those events didn't happen, our view of paying the dividend would have been different," Martin says. "We did not sell any business to get cash to fund the diet drug litigation."

Even so, Wyeth stopped raising the dividend at the end of 1999. For the next six years, the quarterly payment was 23 cents. On Dec. 1, Wyeth paid 25 cents as a reward to shareholders, Martin says.

"The uncertainty level has declined," he explains. "Our management and board are saying that we are comfortable with our cash position, the diet drug litigation and the needs of our company."

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