American Home Says It's Happy on Its Own
Obesity and lawyers are on the rise in the U.S., and American Home (AHP) can't shake either, it seems.
American Home rebounding
The good news is that American Home, best known as the maker of drugs such as Premarin for osteoporosis, has never been in better shape, with seven recent product approvals, a roster of promising drugs in development and little patent expiration exposure.And in spite of having held merger talks with three different drug companies in the past three years, the company now says it's strong enough to compete without merging with a rival, a course most recently taken by Pfizer (PFE) with onetime AHP suitor Warner-Lambert and Glaxo (GLX) with SmithKline (SBH). American Home shares rose 94 cents Tuesday to $62.19, leaving them just a quarter shy of their 52-week high.
Merger Averse"We aren't talking to anyone and we're not listening to anyone," says Bob Essner, president and chief operating officer, when asked about merger talks at a CIBC World Markets health care conference in New York this week. "We have enough scale to hedge ourselves from the unpredictability of research." The long-running litigation has cast a cloud over the Madison, N.J., drug maker since the drugs were withdrawn over claims that some patients developed heart-valve and other medical problems. The company has already allocated $4.75 billion to cover claims but said earlier this year it may have to increase the reserves by as much as $5 billion. Now, according to CFO Ken Martin, the final total figure could be up to $9 billion, or some $4.25 billion beyond the company's original estimate. And while the majority of the cases could be settled by next year, litigation could linger for most of the decade, he predicts. "Hopefully in 2001, we will have dealt with substantially all of the cases, but it could be 10 years from now before it all ends," Martin told investors at the conference.
Healthy Drug DevelopmentThe troublesome litigation comes amid a renaissance in the company's drug development arm, where company officials outlined a plethora of late-stage drug development projects expected to drive future earnings growth. And unlike rivals like Merck (MRK), Eli Lilly (LLY) and Schering-Plough (SGP), American Home faces few patent expirations in coming years to major drugs on the market, which include Effexor for depression, Enbrel for arthritis and a batch of oral contraceptives. American Home has "one of the most dynamic product pipelines, strong sales growth in its pharmaceutical business and continual margin expansion," says Morgan Stanley Dean Witter drug analysts in a note to investors. The brokerage calls American Home "the best fundamental upgrade story in the drug sector," rating it a buy. Morgan Stanley hasn't done recent underwriting for American Home. New drugs expected to make a splash in coming years include Protonix, a new ulcer drug that could take a chunk out of AstraZeneca's (AZN) dominant share of that market with its Prilosec; Rapamune, a treatment for kidney transplant patients; Prevnar, a vaccine for childhood diseases; and BMP, a drug that appears to actually build bone mass in osteoporosis patients. Current treatments like Merck's Fosamax only arrest the decline in bone mass.
But Some Concerns RemainCompany officials particularly raved about Prevnar, calling it American Home's most successful product ever launched, with first-year sales expected to be close to $450 million. The vaccine was approved last February and 5.3 million doses have been shipped to date, according to Essner. Not all product launches have been as strong, however. For instance, Sonata, a new sleep medication, has "clearly fallen short of the hopes we had for it," said Essner. Still, even with the product news and other moves, such as the recent agreed sale of its struggling agricultural division for $3.9 billion, the receipt of a $1.8 billion merger breakup fee from Warner-Lambert and its pending sale of part of its 54% stake in Immunex (IMNX), some investors say the company still has a lot to prove. "This is a show-me kind of stock," says Bob Rhodes, portfolio manager at Trusco Capital Management, an Atlanta fund that recently sold its American Home holdings but held onto other drug stocks, like Merck, Pfizer and Schering-Plough. "People are right to be skeptical, since they have had a lot of misstarts -- like aborted mergers."
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