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Heart Valve Case Leaves Pfizer Under a Cloud : Law: Failures of a device produced by an Irvine subsidiary continue to haunt the health-care giant. Concern over the cost of settling legal claims has investors nervous.


Pfizer Inc. was supposed to be on a roll in 1990. After years of lackluster results, the diversified health-care giant was set to reap the rewards from a bevy of blockbuster new drugs. Wall Street critics, impatient for better earnings, would finally be silenced.

But instead of a celebration, the beginning of the new decade has been a public relations disaster for Pfizer. And the culprit is a product that the company hasn't sold since 1986, whose problems were well publicized long ago: the Convexo/Concave heart valve, once the key product of Pfizer's Shiley Inc. subsidiary in Irvine.

Of the 86,000 valves implanted in heart patients worldwide between 1979 and 1986, 391 are known to have failed, with two-thirds of those failures causing death. Pfizer stoutly maintains that liability arising from the defective valves will have no material impact on earnings now or in the future. Still, when public attention was focused on the problem in the wake of a California appellate court decision in January, a congressional hearing in February and a new lawsuit earlier this month, Pfizer stock plummeted. The stock now trades at $61 a share after reaching $75 last year.

And the company is in the unenviable position of losing even if it ultimately wins the tangled legal battle over the Shiley valve. Most analysts believe that Pfizer and Shiley will be able to refute allegations that they fraudulently concealed information about design and manufacturing flaws in the valves and will be able to avoid massive liability of the type that destroyed A. H. Robins Co., manufacturer of the notorious Dalkon Shield intrauterine device.

But even the rosiest scenario for Pfizer includes years of adverse publicity, expensive litigation and costs running into the hundreds of millions of dollars to settle claims. And the worst-case scenario is very bad indeed. "It's an open-ended problem that will pop up like a jack-in-the-box for years," said Christina Heuer, a drug analyst with Smith Barney, Harris Upham & Co. in New York. "There's a risk investors don't take with other drug companies."

To be sure, product liability lawsuits are anything but a rarity in the drug and medical products industries. While the Dalkon Shield case remains unique--the victims will ultimately receive $2.4 billion--the list of companies that have been hit with massive liability lawsuits includes Eli Lilly and Co. (for the arthritis drug Oraflex), G. D. Searle (for the intrauterine device Copper-7), Merrell Dow Pharmaceuticals (for the morning sickness drug Bendectin) and a veritable laundry list of big drug companies for the pregnancy treatment diethylstilbestrol (DES).

Only A. H. Robins, which went into Chapter 11 bankruptcy and was later acquired by American Home Products, was badly hurt by the litigation. And some cite that fact as evidence that Pfizer's risk is limited. "Nothing is going to happen," said Joseph Riccardo, a drug analyst at Bear, Stearns & Co. in New York. "That's the history of this business. They got one company." Pfizer, he speculated, might pay out "a couple of hundred million over 10 years," a sum that would easily be covered by insurance and reserves.

Pfizer, which earned $681 million on revenue of $5.7 billion last year, can clearly weather claims of that magnitude. The company has for years downplayed any potential impact from the Shiley litigation and still says the Shiley valves have saved the lives of far more patients than they have harmed.

Moreover, Pfizer should get a big financial boost over the next few years from several long-awaited products. Smith Barney's Heuer estimates that Procardia XL, a new one-a-day treatment for angina and hypertension, will produce $800 million in new revenue, while the new anti-fungal agent Diflucan will bring in $600 million. "They're blockbuster drugs, major winners," Heuer said.

Jean-Paul Valles, Pfizer senior vice president, said the company's "financial strength is second to none," pointing to a triple-A bond rating from Moody's Investors Service. "We have an excellent new product pipeline and the marketing expertise to launch that pipeline." Valles called the valve problem "an old story" that resulted in "an unjustified level of bad publicity" and said Pfizer earnings would grow at a compound annual rate of 10% to 15% in the 1990s.

Executives at Shiley, which produces a range of cardiopulmonary products such as heart-lung machines but no longer sells heart valves in the United States, said the subsidiary hasn't been damaged by the problems. "It's not having an impact on the sales of other products," said company President Patrice Froidure, though he confirmed that the issue takes up a great deal of his time.

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