Moody's Investors Service downgraded Wyeth's (WYE) senior unsecured rating to Baa1 from A3, concluding a rating review initiated on October 22, 2003. Following this rating action, the outlook is negative. At the same time, Moody's confirmed Wyeth's Prime-2 commercial paper rating. Ratings downgraded: Senior unsecured notes, debentures, bank credit facility, industrial revenue bonds, pollution control bonds to Baa1 from A3 Senior unsecured shelf rating to (P)Baa1 from (P)A3 Ratings confirmed: Prime-2 commercial paper; VMIG-2 pollution control bonds The downgrade reflects: (1) Moody's opinion that Wyeth is becoming increasingly likely to require additional reserves related to diet drug litigation in excess of the new $2 billion charge recently announced; and (2) Moody's concern that diet drug cash outflows will result in higher debt levels for the foreseeable future, because of fewer non-core assets available for divestiture.

The negative outlook reflects the significant amount of uncertainty associated with the ultimate magnitude of Wyeth's diet drug-related costs, and the inability to rule out extremely large costs. Wyeth has stated it is unable to estimate the amount of any additional financial exposure, that the amount of any new charge could be significant, and that it is not possible to predict whether the ultimate liability will have a material adverse effect on the Company's financial condition.

While Moody's cannot predict the ultimate potential losses to Wyeth related to the diet drug litigation, the new Baa1 rating would accommodate an additional charge -- all other factors constant -- of up to $5 billion. Moody's believes that new liabilities of this magnitude, combined with liabilities currently reserved for, would result in retained cash flow to debt metrics (adjusted to reflect cash balances) appropriate for the Baa1 rating level. Depending on the magnitude and timing, a charge in excess of this amount could result in further downward rating action. On the other hand, if Wyeth demonstrates over time that diet drug costs are more predictable and controllable, maintains good performance of core product franchises, and advances products with promising commercial potential through its pipeline, Moody's could revise the rating outlook to stable.

The Baa1 rating reflects Moody's expectation that the underlying strength of Wyeth's core pharmaceutical business will assist the company in accessing the public debt markets in order to fund diet drug costs as well as approximately $2.5 billion of long term debt maturing between 2004 and 2006. Moody's believes that Wyeth's free cash flow -- prior to considering litigation payments -- should improve from the negative levels of 2001 and 2002 because of growth in product sales, lower capital expenditures, and lower pension contributions over the next several years.

Although Moody's does not expect that Wyeth will launch any major blockbuster products in the next few years, growth in products like Effexor, Enbrel and Protonix should more than offset declining Premarin and Prempro sales, and allow Wyeth to achieve growth rates comparable to most large pharmaceutical companies. Wyeth's drug portfolio appears reasonably protected from patent expirations until 2007-2008, when certain patents related to Prevnar and Effexor begin to expire. Following the recent $2 billion reserve increase, Wyeth's diet drug reserve amounted to $3.6 billion as of September 30, 2003. This reserve includes estimated minimum aggregate costs associated with: (1) remaining initial opt-outs and primary pulmonary hypertension (PPH) cases; (2) intermediate and back-ended opt-outs, which appeared to total 78,000 individuals as of September 30, 2003; (3) additional payments to the National Settlement Trust, which has received some 108,400 matrix-level claim forms; and (4) legal expenses. Moody's believes there is considerable difficulty in estimating the cost associated with intermediate and back-ended opt outs, based on the extremely limited number of trials thus far, but believes that these costs could be high. Moody's also believes there is a very high likelihood that the National Settlement Trust will run out of funds, given that the majority of the claimants allege conditions that could entitle them to Level II awards, which range from $192,111 to $643,500. If the settlement trust is exhausted individuals who would be entitled to benefits from the Trust following audit of their claims could pursue opt out rights and litigate against Wyeth, unless Wyeth first elects to pay the matrix benefit.

Moody's acknowledges certain factors that could help to limit Wyeth's exposure, such as the more limited rights of intermediate and back-end opt outs relative to the initial set of opt outs, the large number of duplicate or incomplete claim forms filed with the settlement trust, the 100% audit process, and the Integrity Program adopted by the trust. Given the sheer number of claimants in the various categories and the potential for high costs per claimant, however, Moody's believes that there is a increasing likelihood that further reserve increases will be necessary. Over time, Moody's believes that Wyeth's debt levels may rise to cover these costs. Unlike the recent past when Wyeth divested non-core assets, including its agricultural business for $3.8 billion and its Amgen holdings for over $4 billion, the company owns fewer non-core assets, and could therefore be much more reliant on external financing. Nonetheless, Moody's believes that Wyeth's liquidity currently remains strong, based on reported cash and short term investment balances totaling over $4 billion (although partially located off-shore and potentially subject to repatriation taxes), committed bank credit facilities of $2.7 billion, and relatively modest short term borrowings and current maturities of long term debt (totaling approximately $791 million of commercial paper and $500 million of notes due in February 2004).

Moody's believes that Wyeth's current sources of liquidity should more than cover the next 12 months of cash needs. Longer term, the strength of Wyeth's liquidity will depend on the amount and timing of diet drug costs, and the refinancing of additional debt maturities including $1 billion in 2005 and $1 billion in 2006. With over $14.6 billion in 2002 revenues, Wyeth is a major pharmaceutical and health care products company, engaged in the discovery, development, manufacturing, and marketing of pharmaceuticals, vaccines, biotechnology products, and nonprescription medicines.