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Insider Selling Has Some Wondering What's Next at American Home

American Home's (AHP) top execs are making sure their Christmas is a happy and prosperous one, even though it hasn't exactly been a banner year for the New Jersey drugmaker.

Top officials at the company exercised a flood of stock options in the past three months, generating hefty gains. The moves come as American Home deals with the aftermath of huge product recalls, legal challenges, regulatory problems and three failed mergers in recent years.

Even so, the stock has rallied sharply this year, gaining 55% as investors shifted out of tech stocks and into safer drug plays. That has made the executives' options quite lucrative and has some observers wondering about the timing of the sales.

Deja Vu?

For instance, Chairman and CEO John Stafford realized a gain of $10.3 million after exercising options to buy 250,000 shares at $19.06 and selling them for $60.56. Louis Hoynes, senior VP and chief lawyer, and Robert Essner, president and chief operating officer, each brought home gains of at least $4 million by selling shares after exercising options, according to regulatory filings. Five other insiders also sold stock in the most recent round.

While exercising options is business-as-usual for top executives in many companies, the matter is worrisome to some. First Call, in an analysis posted Wednesday, said AHP insider stock sales this year were "the first of any note at the company since insiders sold in early 1999, ahead of a 40% slump." AHP stock slipped Friday to $60, off a 52-week high of $65.25.

Strong Showing
AHP outperforming the drugs index

Bulls say American Home is putting its troubles behind it, with seven significant drug or vaccine approvals this year and a bevy of promising products in development. And the financial picture is brightening: Third-quarter sales rose 15% to $3.7 billion, while earnings swung to 58 cents a share from a year-ago loss. But that's also why some say it seems odd that directors sell now, rather than buy to hold.

"Despite the recent appreciation, it seems curious that with seven recent product approvals, a roster of promising drugs in development, and relatively little patent expiration exposure, AHP insiders would surface with the largest single round of dispositions in company history," says First Call, adding that directors sold "rather than hold tight for what many consider to be a promising future."

Lowell Weiner, AHP's spokesman, says Stafford, who is 62, sold shares "for estate planning purposes" and said they represented less than 8% of his holdings. "Options have to be exercised in a certain time period or they are lost," says Weiner. He couldn't immediately say if Stafford had run up against the deadline, however. He cited similar reasons for other stock sales.

Total Recall

But the disposals come at a time when American Home has faced what looks like more product recalls than any other major drugmaker. The biggest this year was of its top-seller Premarin, a hormone replacement drug. The recall involved up to 382 million doses, or about 17% of what AHP sold last year, after they were found not to dissolve properly. But 4 million doses of Lodine, a painkiller, were also pulled after they were found contaminated with a blood pressure drug. That comes on top of the previous withdrawals of diet pills Pondimin and Redux, the painkiller Duract and the vaccine Rotashield.

Lost sales from the Premarin recall, combined with previously disclosed supply constraints with a top-selling arthritis drug called Enbrel, could hit sales next year, some skeptics say. Hence, it may be a good time for executives to sell.

American Home insists the Premarin recall isn't "material," but wouldn't discuss lost sales or costs for the recall. But both it and its partner Immunex (IMNX) have said that they may have trouble meeting demand for the fast-growing Enbrel next year.

Keeping Up With the Bristols

Some analysts are bullish on AHP anyway, due to strong growth in new drugs including Protonix, a new ulcer drug that is eating into sales of AstraZeneca's (AZN) top-selling gastrointestinal drug Prilosec. Executive stock sales are no cause for alarm, they say.

"In the last two weeks, executives at a lot of companies have sold a lot of stock," says Sergio Traversa, analyst with ING Barings. "It's more a coincidence with AHP than anything else."

Lois Fontana, director of research at State Street Global Advisors, one of American Home's biggest stockholders with 24.5 million shares as of Sept. 30, says other companies have also faced product recalls, merger setbacks and legal and regulatory challenges in a turbulent pharmaceutical industry. And in the face of this, the company built a strong portfolio of drugs in development.

"Management has been sorely tried in recent years," says Fontana. "In general they have come out very well. They have really worked for shareholder value."

But it may stick in the craw of some investors that American Home executives get rewarded so handsomely after managing a company that seems to have been fraught with more setbacks than any other major pharmaceutical company in recent years.

It would be unthinkable, for instance, for a Pfizer (PFE) or a Merck (MRK) to suffer through six drug withdrawals in three years, with two -- Pondimin and Redux -- causing a colossal legal quagmire that may cost up to $9 billion. And it's rare for major drug companies to be issued the dreaded FDA Form 483 for major shortcomings at two manufacturing plants, prompting the company to set aside $56 million to cover government fines and plant upgrades this year.

And while merger talks are common in the drug business and often never amount to anything, American Home has the dubious distinction of failing thrice in highly publicized late-stage merger discussions with SmithKline Beecham, Monsanto and Warner-Lambert. The last-mentioned at least made some money for the company, in the form of a $1.8 billion breakup fee after Pfizer swept in and carried off the prized maker of the multibillion-dollar cholesterol drug Lipitor.

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