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25 Jan 2001
MOODY'S DOWNGRADES AMERICAN HOME PRODUCTS' DEBT RATINGS (SR. TO A3, SHORT-TERM TO PRIME-2); OUTLOOK STABLE
Approximately $2.4 Billion of Debt Securities Affected.
New York, January 25, 2001 -- Moody's Investors Service downgraded the long term debt ratings of American
Home Products Corporation (AHP) to A3 from A2, and downgraded AHP's
short term rating to Prime-2 from Prime-1. These
rating actions follow the company's announcement that it will record an
additional charge of approximately $7.5 billion related
to the diet drugs Pondimin and Redux. This charge is expected to
result in significant incremental debt in 2001 and 2002, which Moody's
believes raises the risk profile of the company. The ratings outlook
is stable. Despite the magnitude of the new charge and Moody's
opinion that additional charges cannot be absolutely ruled out,
the A3/Prime-2 ratings and stable outlook reflect Moody's expectation
that the most recent charge substantially captures AHP's liability.
American Home Products Corporation -- notes and debentures
to A3 from A2, shelf registration of debt securities to (P)A3,
from (P)A2, commercial paper to Prime-2 from Prime-1.
In October 2000, AHP disclosed that additional diet drug litigation
charges would be required, but would not exceed the third quarter
1999 charge of $4.75 billion. Therefore, the
new charge of $7.5 billion, which brings total diet
drug charges recorded to date to over $12 billion, significantly
exceeds Moody's previous expectations. AHP has reported that the
primary reasons for the higher than expected charge were the number and
nature of the opt-out claims and the higher cost of the decision
to settle the bulk of the opt-outs and primary pulmonary hypertension
(PPH) cases immediately, rather than to fight through hundreds of
trials over the next several years.
AHP has reported substantial recent progress in settling the number of
opt-out cases, which totaled over 49,000 in number.
These recently negotiated settlements, however, are expected
to result in large cash outflows in the near term. Together with
the ongoing settlements of opt-out claims, as well as expected
payments into the National Settlement Trusts, Moody's expects that
AHP will incur incremental debt of approximately $5 billion in
2001 and another $1 billion in 2002. Moody's believes this
additional debt load will depress AHP's credit protection measures over
the next several years. Initially, AHP will fund these payments
with short term debt, but anticipates terming out a fairly large
portion of the sum.
Moody's recognizes AHP's favorable liquidity position, with approximately
$3.0 billion in cash and short-term investments at
year-end 2000 and negative net debt, resulting in part from
large asset sales in 2000, i.e. the agriculture business
for $3.8 billion and a portion of its holdings in Immunex
Corporation for $2.3 billion. AHP still maintains
almost $8 billion (market value) of Immunex shares. In addition,
Moody's recognizes the strength of AHP's underlying pharmaceutical business,
which achieved 19% revenue growth in 2000, driven by the
strength of such products as Premarin (estrogen supplement), Effexor
(anti-depressant), and Enbrel (arthritis treatment).
AHP's pharmaceutical portfolio is characterized by low patent expiration
risk, and a rich product pipeline. Moody's believes AHP's
revenues and operating cash flow will continue to grow from reported year
2000 levels of $13.3 billion and $2.5 billion
respectively. All of these factors contribute to Moody's A3/Prime-2
ratings on AHP. Moody's expects that declining settlement payments
and continued revenue and cash flow expansion, driven by existing
and new products, will result in significant de-leveraging
beginning in 2003. Moody's considers the pharmaceutical industry
to hold a substantial a level of business and operating risk, a
factor reflected in our ratings of AHP.
Given that prior estimates of diet drug charges have needed to be increased,
Moody's believes that some degree of uncertainty remains with respect
to the finality of the most recent charge, which includes an unspecified
amount related to settling remaining opt-out payments. Management
has disclosed that the remaining opt-out cases contain approximately
50 PPH cases, which are more costly to settle. However,
given the substantial progress made in settling opt-out cases,
with approximately 80% of cases settled, Moody's ratings
are based on the expectation that AHP's ultimate cost should be substantially
contained within the current charges. These factors contribute
to a stable ratings outlook over the near term.
American Home Products Corporation, headquartered in Madison,
New Jersey, is one of the world's largest pharmaceutical and health
care products companies. AHP discovers, develops and markets
prescription drugs, over-the-counter medications,
vaccines, and animal health care products.
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653
Vice President - Senior Analyst
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653
No Related Data.
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