American Home Products ( AHP) said Wednesday it plans to reduce its majority stake in Immunex ( IMNX), a top biotech company based in Seattle, in a move that could raise up to $2.7 billion. But American Home denied that the move, which could cut its stake to 43% from 55%, was aimed at raising money to pay for rising costs to settle diet-drug litigation , a cost that the company acknowledged could balloon far beyond its original estimates. That cost has become an albatross for American Home shareholders, and, until the matter is resolved, the company isn't likely to be able to acquire other drug firms or to be acquired, observers say. American Home said last month it may have to boost its reserves, currently about $3.3 billion, by "less than $5 billion" to pay for litigation from two diet drugs that were withdrawn in 1997. Analysts speculated the company could need as much as $3 billion more.
Lowell Weiner, a company spokesman, says the company is flush with cash. He says American Home will use the money from the Immunex stake sale to boost research and development and to fund other corporate purposes. The company recently got $1.8 billion as a merger breakup fee from its broken deal with Warner-Lambert, and an added $3.8 billion from the sale of its agrochemicals division. "We don't need this cash to handle litigation," Weiner says. "We're confident the cost is manageable from existing resources." He says the company simply wanted to "monetize" stock gains from Immunex. American Home said it plans to sell up to 50 million Immunex shares in a secondary offering, "market conditions permitting." Separately, Immunex said it filed to sell up to 20 million new Immunex shares.
But Perhaps Less Than a Full House
American Home inherited its stake in Immunex in 1994 when it bought American Cyanamid, an agrochemical and drug company. That purchase turned out to be hugely successful for American Home, allowing it to benefit from Immunex's rapid stock gains and giving it access to Enbrel, a fast-growing arthritis drug that both companies sell. After the stock sale, American Home will continue to market Enbrel, the company said. The move comes at a time when other drug companies are boosting their stakes in biotech companies, looking to bolster their product offerings as in-house research-and-development operations become less productive. Genentech ( DNA), for instance, is 59% held by Roche, while Chiron ( CHIR) is about 44% held by Novartis ( NVS).