Excerpted from Forbes.com, Friday, 26 January 2001.

Disaster Of The Day: American Home Products

Matthew Herper -- The lethal weight-loss cocktail, fen-phen, just cost American Home Products another $7.5 billion. That's on top of $4.75 billion the Madison, N.J.-based drugmaker already earmarked to pay off class-action lawsuits from diet drugs Redux and Pondimin, which were used as part of the diet drug fen-phen.

As a result of the charge, American Home (nyse: AHP), the fifth-biggest drugmaker in the U.S., posted a fourth-quarter loss of $3.8 billion. In the pharmaceutical industry, which has been accustomed to annual revenue growth of more than 20%, that's almost unheard of. American Home's operating profits for the quarter were actually up 17%.

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In 1997, American Home pulled the two diet drugs from the market. Redux and Pondimin caused damage to heart valves when used with the diet drug phentermine as part of fen-phen. By withdrawing the drugs from the market, American Home de facto admitted they were causing the problems. It might as well have put a giant "mug me!" sign on its back.*

Lawyers swarmed, bringing class-action suits. American Home has already paid 80% of the 50,000 litigants, it says. Of the 10,000 remaining, only 3,000 have actually brought suit. The $7.5 billion charge represents the estimated final amount needed to settle all of the diet drug litigation, including a nationwide class-action settlement, individual settlement payments, the costs of surgeries and legal fees.

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* An earlier version of this story stated that "When withdrawing the drugs from the market, American Home admitted they were causing the problems." American Home Products denies admitting this.

Excerpted from Forbes.com, Friday, 26 January 2001.