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Fen-phen deal reached
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October 7, 1999: 8:18 p.m. ET
American Home Products reaches settlement, sets $3.29B after-tax charge
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NEW YORK (CNNfn) - American Home Products Corp. reached a multi-billion-dollar agreement to settle thousands of lawsuits involving the fen-phen diet pill litigation Thursday, seemingly ending the most troubled chapter in the company's long history.
Under the settlement, which is subject to court approval, the drug maker will pay up to $3.75 billion to compensate thousands of people who used American Home Products (AHP) Redux or Pondimin diet pills before the products were pulled from the market in 1997 because of possible heart valve abnormality side effects.
The company expects to take a $3.29 billion, or $2.51 per share, after tax charge against their current fourth-quarter earnings to cover the cost of the settlement. But company officials said the agreement held few financial ramifications beyond the current period.
"This settlement puts the litigation behind us so we can focus on our promising future," said Louis Hoynes, AHP's general counsel. "We have a lot to contribute medically around the world and we would like to get on with it."
"Today, things look much rosier for American Home," agreed Robert Kirby, a healthcare analyst with Edward Jones. "The degree of uncertainty at the company is much less today than it was four or five months ago."
Terms of the deal
Under the terms of the agreement, which was announced separately by the Madison, N.J.-based company and plaintiff attorneys in Philadelphia, AHP will create two separate funds.
The first will contain $1 billion to refund users of the two drugs for their prescription costs, their medical screenings and either lump cash payments or additional medical care related to possible side effects. An additional $200 million will be used to cover attorneys' fees.
The second fund, which cannot exceed $2.55 billion, will serve to compensate claimants with significant heart valve disease up to $1.5 million and pay attorneys' fees.
Total payments over a 16-year period cannot exceed $3.75 billion in present value, the company said. Future payments will be made "only as and if needed," AHP said.
Click here for the specific terms of the deal
The financial payments and medical care will only be made available to those who agree to accept the settlement, whether they have filed a lawsuit against the company to this point or not. AHP estimated between 6,000 and 6,500 lawsuits have been filed thus far.
Company officials said if an inordinate number of claimants do not agree to the settlement and pursue individual lawsuits, AHP has the right to rescind the offer.
But Arnold Levin, an attorney with Levin Fishbein Sedran & Berman and co-lead counsel for the plaintiffs, said acceptance likely would not be a problem.
"I think there will be a big acceptance of this settlement," Levin said "It's a very, very fair and adequate settlement. It takes care of every potential problem or eventuality."
A no-fault settlement
Company officials quickly pointed out the settlement did not represent any admission of guilt on AHP's part. They noted ongoing scientific studies indicate a majority of people who took the fen-phen drug never developed any ailments.
But noting the settlement was "fair and equitable" for both his company and the claimants, AHP Chairman, President and CEO John Stafford said it was time for AHP employees, customers and investors to move on.
The company also settled claims last month from about 36,000 women who said they suffered severe side effects from the company's Norplant birth control implant.
The settlement "will not impair our ability to grow and pursue the business that we are in," Stafford said in a conference call with reporters. "Today, we have in our research pipeline products that will solve some of the world's most pressing health problems and this settlement will allow us to do that."
John Consindine, AHP's vice president for finance, said the settlement will impair the company's cash flow by less than $100 million for the remainder of 1999, and then scale up to $1 billion in 2000 and $200 million in 2001 and $1.1 billion in 2002.
However, the company also has nearly $2 billion in available cash on its books and analysts speculated Thursday the company could ultimately sell off its agricultural business if they needed extra cash in the future.
Not an impediment
AHP earned nearly $2.5 million last year, an increase of 21 percent over 1997 despite a slight drop in overall sales.
Analysts expect the company to earn 47 cents per share for the recently-completed third quarter, a penny better than the same period last year, according to First Call Corp. Before Thursday's settlement, analysts had predicted fourth quarter earnings of 46 cents per share, two cents better than 1998.
One thing that has dropped in recent months has been AHP's stock price, prompting speculation among some industry insiders that the company could ultimately become a takeover target.
AHP quashed those rumors late Thursday, announcing that its board of directors had adopted a stockholder rights plan "intended to provide protection against coercive or unfair takeover tactics."
If approved, any person or group who acquires 15 percent or more of the company will be required to give each holder of a right a number of AHP shares having a market value double the exercise price. The plan will be distributed to stockholders on Oct. 18.
AHP (AHP) shares were halted on the New York Stock Exchange for several hours after the announced settlement. The stock eventually gained 3-5/8 to 48-3/4 earlier in the session.
Reports have circulated for several weeks that American Home Products and plaintiffs were near an out-of-court settlement that would resolve the vast majority of the lawsuits stemming from the fen-phen diet pill combination, which was recalled in 1997 after being linked to heart valve damage and other medical problems.
Speculation mounted earlier this week that a settlement was close after a New Jersey judge suspended a class-action trial and dismissed the jury in light of the ongoing settlement talks. 
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American Home Products
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