American Home in Fat City Even as Charge Swells
American Home (AHP) 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
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
Need Some ScratchOthers 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) 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."
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