Street Elated Over AHP's Fen-Phen Settlement

But the final terms of the proposed agreement are still uncertain since up to 6 million fen-phen users could come forward.
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Shares of

American Home Products

(AHP)

surged almost 8% Thursday after the company offered to pay up to $3.75 billion to people who took the popular diet combination fen-phen.

The company said it would take a $4.75 billion pretax charge, equivalent to $2.51 per share, but the terms of the proposed settlement offer left its finality undetermined. Still, the Street had expected a costlier settlement of the thousands of lawsuits against the company. Shares of AHP closed at 48 11/16, up 3 9/16 for the day, the highest price since Aug. 5, six days before the company paid a 22-cent dividend.

Terms of the offer looked favorable for the company compared to "the market expectation of $5 billion to $10 billion for the total liability," says Ajay Bansal, who has a neutral rating on the stock for

Mehta Partners

. "This was a big uncertainty" that had driven the stock price down, he said.

Several thousand lawsuits claimed that AHP failed to warn users of the diet drugs

Redux

and

Pondimin

about the potential side effects of fenfluramine and dexfenfluramine, the active ingredients that were half of the popular fen-phen diet combination.

Under pressure from the government, AHP pulled the drugs off the market in 1997 after

Mayo Clinic

health researchers said some users may have developed heart-valve damage.

Thursday's settlement offer in no way ends the matter. About 6,000 lawsuits have been filed, according to the company, but the settlement was extended to anyone who took the drug. That number has been widely reported as 6 million by numerous published reports.

Under the settlement, which still requires federal court approval, the company would set up two funds. The first will cover refunds, medical screenings and treatments, cash payments, education, research and administration, will hold $1 billion. Over the next 15 years, the company could pay up to $2.55 billion in 1999 dollars into the second fund for treatment of drug users who suffered severe heart damage.

Just how many people would participate is "difficult to know," says Stephen Sheller, lawyer for fen-phen users in Pennsylvania and New Jersey. But that number will determine whether the settlement is viable. Louis L. Hoynes, AHP senior vice president and general counsel, says the company expects the "vast majority will participate" in the settlement. He notes that the company can withdraw from the settlement if it believes too few people have agreed to participate.

If, however, a full 6 million users came forward, just reimbursing them for two months of buying the fen-phen combination would cost $1.08 billion, more than the $1 billion set aside in Fund A for refunds as well as medical screenings, treatment, education and research.

Sheller says he doubts that 6 million people really even took the drug. He says the offer will be "adequate to compensate those who stay in the settlement and want medical monitoring."

"Usually when you pay $4 billion, its kind of a sign the white flag went up," Sheller says. But "that isn't the total cost of the thing because of the opt-outs."