When analysts look at

Wyeth

(WYE)

, they see a light at the end of the tunnel -- but it's no longer the headlight of an oncoming train.

For years, the company faced the mounting legal bills and uncertainty associated with fen-phen diet drug litigation. In recent weeks, however, a couple of encouraging headlines suggest that when the company issues its quarterly financial report Monday, Wall Street's Wyeth watchers can spend more time reflecting on products and less time worrying about lawsuits.

"The shadow of diet drug litigation is diminishing," said Albert L. Rauch, of A.G. Edwards, in a report to clients on Jan. 26. "However, we still expect the company to take additional charges to add to its litigation reserves."

Wyeth has set aside $16.6 billion in reserves, and even analysts more optimistic than Rauch -- he has a hold rating on the stock -- expect the company to increase those reserves over time.

Rauch predicts Wyeth will earn 69 cents a share for the fourth quarter. Analysts polled by Thomson First Call are expecting a profit of $900 million, or 67 cents a share, on revenue of $4.66 billion.

For the same period in 2003, Wyeth earned $801.7 million, or 60 cents a share, on revenue of $4.33 billion, excluding items.

For fiscal 2004, the Wall Street consensus forecasts a profit of $3.58 billion, or $2.68 a share, on revenue of $17.35 billion.

"The diet drug litigation will likely continue to cast a shadow over the shares and pressure valuations," said Rauch, who doesn't own shares. (His firm has a short position in the stock.)

Still, the sentiment for Wyeth has improved in recent months. According to Thomson First Call, analysts have issued 11 buy ratings and 16 hold ratings. Three months ago, there were nine buy ratings, 12 hold recommendations and two sell recommendations.

Chris Shibutani, of J.P. Morgan, upgraded the stock to overweight from neutral on Jan. 18 after Wyeth issued encouraging comments about settling some of the fen-phen cases. If the parties agree, this "removes the dominant uncertainty overhanging shares," Shibutani said in a research note.

Wyeth confirmed -- but offered no details -- on Jan. 18 that it was negotiating with lawyers representing people who had declined to participate in a 1999 national class-action lawsuit settlement involving the diet drugs Redux and Pondimin.

The negotiations were disclosed by

The Wall Street Journal

, which said the talks could involve claims by more than 60,000 people. The

Journal

said lawyers representing 11,000 plaintiffs have agreed to the new settlement process for cases outside the scope of the national diet drug settlement.

Earlier in January, Wyeth said it supports an updated revision of the class-action settlement that would deal with "the least serious but most numerous claims" in the 1999 settlement.

"Diet drug litigation aside, Wyeth's base business enjoys above average growth prospects and relatively limited generic exposure," Shibutani said. The first big generic assault will come in 2008 against the antidepressant Effexor XR.

"Operationally, Wyeth has good and low-risk earnings visibility in the near term," he added. Over the long term, the company has a "solid and well-balanced pipeline," which includes five drugs for which Wyeth could seek FDA approval in the next two to three years. (He doesn't own shares; his firm has had an investment banking relationship with Wyeth in the last 12 months.)

Another endorsement for Wyeth comes from C.J. Sylvester, of Banc of America Securities, who recently told clients he expects a "very strong" fourth quarter and an EPS of 70 cents, which is 2 cents above consensus. He has a buy rating on the stock.

"Although we consider the ongoing diet drug litigation a serious issue for Wyeth, we expect any impact on the company's financial returns to be manageable," he said in a recent research report. "We could envision an additional reserve of $6 billion to $8 billion."

Because Wyeth won't face patent challenges on big products until 2008, Sylvester said the company's sales growth for the next two years will be the third-best among Big Pharma companies -- trailing

Eli Lilly

(LLY) - Get Report

and

Schering-Plough

(SGP)

.

The next big, new product on the horizon is the antibiotic Tygacil, which Sylvester predicts will be approved by the FDA during the second half of the year. Tygacil is the first in a new class of antibiotics, and it is being aimed at serious and complicated infections or against bacteria that have developed a resistance to other antibiotics. In its peak year, Sylvester predicts the drug could be a $1-billion product.

However, the test of Wyeth's experimental drugs will come in late 2006 and 2007, he said. That's when the company hopes to market a cousin of the Effexor franchise. Sylvester said tests show the drug, DVS-233, is easier to take and has fewer interactions with other drugs. Getting this product to market quickly should help ease the impact of generic competition for Effexor.

Other promising compounds expected to reach the market in 2006-07 include an osteoporosis drug licensed from

Ligand Pharmaceuticals

(LGND) - Get Report

and a schizophrenia drug licensed from Belgium's

Solvay Pharmaceuticals

.