Will Investors Pull The Plug On Icn's Milan Panic?

Shareholders are weary of lagging share prices

When it comes to survival, Milan Panic is a pro. The Yugoslav-born founder and chairman of ICN Pharmaceuticals Inc. fought in the resistance during World War II, was a champion bicyclist in Yugoslavia, and defected while on tour. After immigrating to the U.S. with $20 in his pocket in 1956, Panic became a multimillionaire in the pharmaceuticals business. Along the way he has breezed past two investigations by the Securities & Exchange Commission, a string of sexual harassment suits, and at least three efforts to unseat him at the helm of ICN.

But now, under pressure from angry shareholders, Panic (pronounced pan-ish) may finally be loosening his grip on the company he has run for more than four decades. ICN shares have trailed both the Standard & Poor's pharmaceuticals index and the broader market average for the last five years. In mid-June, Panic introduced a restructuring plan that called for splitting the company into three. Panic was to remain in control of all the pieces. That last detail caused the stock to fall even further.

Several large ICN shareholders began quietly pushing for more significant change. If Panic doesn't disconnect himself from ICN's more attractive businesses before the annual meeting in late September, they said, he might not get reelected to the board. "Most shareholders are tired of waiting for value to be created," Michael Yellen, senior portfolio manager of the AIM Global Health Care fund, told BUSINESS WEEK. The fund owns 2 million ICN shares.

Panic seems to have come up with a compromise. During a conference call announcing ICN's second-quarter earnings in early August, he suggested that he is rethinking his role at the company. Said Panic: "I am 70 years old, and I'm thinking how to find another man who can develop a billion-dollar drug." ICN is expected to file a new plan that no longer will include a management role or board seat for Panic at an ICN unit that makes a top-selling hepatitis drug. But Panic will remain chairman of the parent company.

RIBAVIRIN ROYALTIES. Ironically, Panic's troubles are occurring even as ICN is enjoying its biggest commercial success. For years, the company grew by making acquisitions of niche products such as dermatological drugs. In the late 1970s, ICN researchers discovered an antiviral compound called ribavirin, which Panic hoped could be a cure for everything from cancer to the flu. Royalties from ribavirin, which is used in combination with another drug to treat hepatitis-C infections, are expected to hit $162 million this year, a fourfold increase in two years. Those royalties should boost ICN's overall earnings 20% this year, to $142 million, on sales of $863 million.

But investors fear Panic will squander that cash on bad investments. "The largest impediment to ICN's stock price is Milan's control. He has not delivered shareholder value in the past, and we are not confident he will do so in the future," says Patricia Loepker, a money manager at A.G. Edwards & Sons who oversees 1.1 million ICN shares.

Panic has had his share of troubles. In 1977, the SEC accused him of reporting false financial statements. Fourteen years later, the commission said Panic falsely promoted ribavirin as an AIDS cure. Panic settled the SEC cases without admitting or denying wrongdoing. Panic also has settled a slew of sexual harassment suits filed by employees in the mid-1990s. ICN's general counsel says the suits were baseless.

Panic's legal woes aren't over. He is now the target of an SEC lawsuit and an investigation by the U.S. Attorney's office in Los Angeles. Both involve Panic's promotion of ribavirin alone as a hepatitis treatment in the mid-1990s after the Food & Drug Administration rejected use of the drug for that purpose. The SEC is seeking to bar Panic from running a publicly traded company. Panic denies wrongdoing in that case.

YUGOSLAV BACKLASH. Investors are concerned with a lot more than the legal tussles. In the early 1990s, Panic began making acquisitions in Eastern Europe and Russia as part of a strategy to make ICN a drug powerhouse in the former Soviet Union. For eight months in 1992 and 1993, Panic even served as Prime Minister of his native Yugoslavia. His criticism of the Milosevic regime prompted the Yugoslav government to renege on payment for drugs purchased from ICN, triggering huge losses.

Panic figured he had the answer to investors' concerns when he proposed selling 20% stakes in ICN's ribavirin business and its international operations to the public in June. Investors saw the plan as an attempt on Panic's part to stay in control of the company. By continuing to own 80% of the two subsidiaries, Panic could make loans and send dividends back to the parent company. "We would not be opposed to Milan running the international operations, but we are opposed to him having his finger in everything," says Eric J. Miller, a money manager whose Heartland Value fund owns 5.1% of ICN's shares. Miller tried unsuccessfully at the last two annual meetings to have Panic retired from the ICN board, by initiating shareholder proposals that would have forced board members to retire at 70. Panic turned 70 last December.

Investors say they will be happy only if Panic truly separates himself from ICN's fast-growing ribavirin business. Anything less and there could be a proxy fight. Says A.G. Edwards' Loepker: "We're waiting with bated breath." But if investors expect an end to the Panic panic anytime soon--well, they may end up blue in the face.