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Potential Legal Liability Is Main Issue
After Redux Recall
By LOUIS HAU
Dow Jones Newswires
NEW YORK -- The threat of class-action lawsuits is now the biggest
concern for American Home Products Corp. (AHP) and Interneuron
Pharmaceuticals Inc. (IPIC) in the wake of American Home's recall of the
diet drugs Redux and Pondimin, according to analysts.
American Home's Wyeth-Ayerst Laboratories unit manufactures
Pondimin. The company also markets Redux, which is manufactured by
Interneuron.
American Home said Monday it expects the recall to reduce earnings by 2
cents a share in the third and fourth quarters and by 10 cents in 1998.
Montgomery Securities Inc. analyst David Crossen described these
adjustments as minimal, adding that the long-run fallout for Interneuron
will also be relatively small once the company turns profitable by fiscal
1999 from the sale of other drugs.
Vector Securities International Inc. analyst Michael King Jr. said that the
biggest worry for American Home and Interneuron is the unquantifiable
legal liability that could potentially emerge after the recall. He said the
prospect of legal action is far "scarier" than any financial impact.
King said he is maintaining a neutral rating on Interneuron because "I
don't see how the stock can outperform while Redux issues remain
unresolved."
Interneuron's Nasdaq-listed shares slipped 1 5/8, or 9.4%, to 16 15/16 on
volume of 3.2 million. Average daily volume is 554,300.
American Home's NYSE-listed shares fell 1 11/16, or 2.2%, to 75 1/4 on
volume of 1 million. Average daily volume is 1.5 million.
In a press release, the Food and Drug Administration said it had asked for
a recall of Redux and Pondimin because of reports of abnormal
echocardiograms among patients who had taken the drugs. According to
new findings by doctors, about 30% of those patients evaluated had
abnormal readings. Echocardiograms are used to test the functioning of
heart valves.
Although the latest news is worrisome, Wall Street observers view the
Redux and Pondimin recalls as merely a case of the other shoe dropping.
Hyped last year as major breakthroughs in appetite suppressants, sales of
the drugs have plummetted in recent months to reports of lung problems
linked to Redux and the development of heart-valve disease in patients
taking "fen-phen," a combination of fenfluramine, the chemical name of
Pondimin, and phentermine, which is marketed by a variety of different
companies. The FDA didn't ask for a recall of phentermine.
While it is impossible to estimate the cost of any potential liability,
insurance should cover most if not all of Interneuron's costs resulting from
potential lawsuits, according to Donaldson Lufkin & Jenrette Securities
Corp. analyst Alex To.
Interneuron, American Home, the FDA, makers of phentermine and a
number of weight-loss centers have been named in two recent lawsuits
filed by patients who have used Redux or fen-phen, according to
Interneuron spokesman William Boni.
American Home spokesman Lowell Weiner said that his company is aware
of 23 deaths among patients who have taken Redux since the drug was
launched in mid-1996, and 26 deaths among people who have taken
fenfluramine since 1973. He added that the company knows of no direct
link between the deaths and the use of the drugs.
To said Interneuron, of Lexington, Mass., should have at least one or two
new products on the market by the time it concludes any litigation.
"We're glad Redux is off Interneuron's back," To said. "Now we can
focus on the real reason to buy Interneuron stock, which is a very strong
drug pipeline."
Interneuron has three drugs in late-stage clinical development: Citicoline,
an oral stroke medication; Bucindolol, a beta blocker for congestive heart
failure; and Pagoclone, a treatment for anxiety and panic disorders.
Interneuron is conducting Phase III clinical trials for Bucindolol and
Pagoclone and should file a new drug application with the FDA for
Citicoline by the end of 1997, analysts said.
To maintains a recommended list-buy rating on Interneuron. Considering
that Redux accounts for about 5% of the company's valuation, he believes
that the stock has been oversold from its 52-week high of 32 5/8.
Oppenheimer & Co. analyst Elliot Wilbur said that the recall will have a
minimal overall impact on American Home. Redux and Pondimin
accounted for about 2% of American Home's sales and earnings in 1996,
he said. He added that Redux was a low-margin product for the company
because of the royalty that it paid to Interneuron. |
