This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

American Home in Fat City Even as Charge Swells

American Home (AHP - Get Report) Thursday overshot its diet-drug litigation cost forecasts once again, but the market was in a forgiving mood, pushing the stock up 5%.

The New Jersey drugmaker, in announcing fourth-quarter operating earnings that were largely in line with analysts' forecasts, said it set aside an additional $7.5 billion to settle a blizzard of legal claims over negative health effects from two diet drugs withdrawn in 1997.

That comes just six months after officials said American Home wouldn't need more than $5 billion for the new legal reserve fund, which was already at $4.75 billion in 1999. And as they had in the past, American Home executives once again said they expect the total $12.2 billion fund would be enough to make the ligitation go away.

Grabbing the Bootstraps

Still, analysts and investors were loath to criticize American Home. These people say it's impossible to predict court cases these days, particularly since American Home acknowleged the two failed pills, Pondimin and Redux, caused health problems. To lawyers, that's basically an invitation to sue on behalf of as many clients as you can line up, through newspaper ads, fliers in drug stores, billboards and other common means in this ever-litigious society.

American Home bouncing back from setbacks

And American Home has demonstrated resilence in the face of the legal onslaught, continuing to push useful drugs through development and onto the market, a feat that accounts for its enduring support with some investors. The company said fourth-quarter income from continuing operations rose to 53 cents a share, or $794 million, from 46 cents, or $602.7 million, all before exceptional items. Revenue rose 16% to $3.5 billion in the quarter, boosted by a 17% increase in drug sales to $2.8 billion.

"They are still one of the best drug companies," says Sergio Traversa, an analyst with ING Barings, which has a buy on American Home and does no underwriting for it. "The products that are driving the company are doing very well." For a cash-rich drug company, a billion here or there "won't make much difference," says Traversa. The main objective is to "clean up the slate" and get on with the business of drug selling and development.

Need Some Scratch

Others marveled at American Home's ability to set aside so much cash. "I am impressed with that they can keep coming up with billions of dollars," says David Saks, portfolio manager with Gruntal Medscience fund, which holds drug and biotech stocks including Pfizer (PFE - Get Report) and Pharmacia (PHA), but not American Home. "These companies have a safety deposit box with an enormous ability to withstand hits like this."

As if to assure investors it isn't facing financial ruin from the litigation, American Home said J.P. Morgan agreed to underwrite an additional $6 billion in credit to add to $2 billion in existing facilities. Even with added interest costs, it plans to meet its earnings goals, it said.

"Despite the increased interest costs ... from this additional financing, management remains confident that strong fundamentals will enable the company to achieve earnings per share in the range of $2.15 to $2.20 in 2001, which is consistent with previous estimates," it said.

Still some investors questioned the company's math. "Every billion dollars in interest is supposed to cost 3 to 4 cents in EPS," says one New York investor. "I don't see how they can make their numbers."

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AHP $9.80 0.31%
MRK $49.16 -0.75%
PFE $29.20 -0.98%
AAPL $94.12 -0.16%
FB $100.85 -0.15%


Chart of I:DJI
DOW 15,725.76 -188.98 -1.19%
S&P 500 1,827.93 -23.93 -1.29%
NASDAQ 4,243.1530 -40.4390 -0.94%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs