November 22, 1999-AHP's Awful losing streak
Among several promising new drugs American Home Products chose to highlight in its latest annual report was RotaShield, a vaccine for infants that had recently been approved by the Food and Drug Administration and recommended for routine use by the Centers for Disease Control and Prevention (CDC). RotaShield attacks rotavirus, an evil bug that every year sends tens of thousands of American babies to hospital emergency rooms with severe diarrhea and vomiting, and, in less developed countries, is said to cause 870,000 deaths per year. Hence the excitement. Here was a product with a global market, perpetual demand, and the potential to save lives on a biblical scale.
But then came reports of a correlation between babies who had recently been vaccinated with RotaShield and babies with a horrifying condition known as intussusception, in which the bowel rolls partway back into itself like a coat sleeve caught on a wristwatch. "In severe cases," the New York Times reported, "a previously healthy infant suddenly screams in paroxysms of pain." In July 1999, less than a year after giving RotaShield its full approval, the federal government warned pediatricians to stop dispensing it, pending an emergency investigation. Today the CDC confirms 29 cases linked to RotaShield requiring surgery, and one death. Late last month, American Home took RotaShield off the market. A sad episode all around-above all for the victims and their families-but also for the fight against rotavirus, and pointedly for American Home, which lately has been trapped in a cycle of bad news. The company settled out of court for $ 50 million with 36,000 users of Norplant, a time-release contraceptive implant with unpleasant side effects. Norplant at least is still being sold. Recent drug recalls have included Duract, a painkiller that may have killed some patients who took it longer than they were supposed to; a packaged adrenalin injection, included in food-allergy and bee-sting kits, which was ineffective; and finally Pondimin, the trade name for fenfluramine, American Home's half of the infamous obesity cocktail fen-phen, blamed for a variety of heart ailments. Hemant Shah, an independent drug industry analyst, says flatly, "No company in the history of the pharmaceutical industry has had so many recalls in such a short period of time."
That legacy, plus plummeting earnings at American Home's agricultural-chemical division (now being prepped for sale), two failed megamergers, and a $ 2.9 billion third-quarter loss (thanks largely to a $ 4.8 billion charge to pay for the Fen-Phen mess), helps explain why American Home's stock has fallen 30% since April.
Yet the stock bottomed in September and has been creeping back up lately, reflecting a willingness-at least on the part of Wall Street analysts-to consider American Home's side of the story. The $ 2.2 billion consumer health-care division (Advil, Dimetapp, Chap Stick, Preparation H) is a cash cow. The pharmaceuticals division's new-product pipeline is "probably the best in the industry," says Hambrecht & Quist analyst Alex Zisson. And then there's Premarin, a 58-year-old estrogen replacement drug. Despite competition from a host of bioengineered competitors, all angling to catch the the same demographic wave of menopausal baby-boomers, Premarin, with a 70% market share and sales approaching $ 2 billion, is still the most commonly dispensed prescription medication in the U.S.
So could it be that once the ag-chem division is sold and the pipeline starts producing-and if the spate of drug recalls reflects bad luck more than bad management-the stock will recover?
Maybe. But there's still the Fen-Phen trouble. Plaintiffs lawyers are calling it the next big thing-not in the same league with tobacco by any means, but at least reminiscent of silicone breast implants. American Home CEO John Stafford says the proposed settlement "is so comprehensive and equitable ... it will be well received by the overwhelming majority of diet-drug users." But some plaintiffs lawyers say otherwise. "I will opt out virtually all my clients," vows Marc Jay Bern, a New York attorney who says he has 5,000 cases. Ditto for Kip Petroff, who recently won a big fen-phen verdict in Texas: "My prediction is they're in big, big trouble."
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