Bad News Takes Toll on Price of ICN Shares
Six months ago, ICN Pharmaceuticals Inc. briefly appeared to be one of the brightest gems on Wall Street.
Trading near its all-time high of nearly $37 a share, the Costa Mesa-based company’s stock was blasting skyward in a dizzying buying frenzy that drove ICN’s market value up nearly 70% in just a matter of days.
Fueling that frenzy was a bullish research report and “buy” recommendation by Paine-Webber Inc., ICN’s investment banker, which claimed that the company’s drug Virazole, touted as a potential AIDS and influenza medication, “could become one of the largest selling drugs in the world.”
These days ICN still makes headlines. But, increasingly, the company seems to be assuming its old position as a Wall Street outcast, a role it played for many years.
On Friday, for instance, the company was hit with a class-action lawsuit by an irate shareholder accusing the company and three senior officials of fraud.
The Securities and Exchange Commission reportedly is investigating possible illegal trading of ICN stock, and Virazole has become the target of a congressional inquiry spurred by allegations that the drug causes dangerous side effects among infants.
In addition to the allegations of unreported side effects, the House Energy and Commerce Committee, chaired by Rep. John D. Dingell (D-Mich.), is looking into other aspects of ICN’s operations, including its heavy use of public relations.
Controversy has always dogged ICN, in part because of the reputation earned by Milan Panic, ICN’s founder and chairman, for his aggressive promotion of Virazole. But analysts and others close to the company say the recent string of misfortunes is unusual--even by ICN’s standards.
“I’ve been an analyst for 25 years, and I have never seen so much bad publicity come out at one time about one company,” said Eugene Melnitchenko, an analyst with the Dallas investment firm of Eppler, Guerin & Turner Inc.
Not surprisingly, investors who bought into ICN last August when its stock topped out at $34 a share have taken a beating.
Based on ICN’S close Friday of $18.75 a share on the New York Stock Exchange, their investments in ICN have fallen by 45% during the last six months. Investors who bought into ICN’s Viratek Inc. subsidiary at its high for the year of $98.50 have seen the value of their holdings fall 59%. On Friday, NASDAQ-listed Viratek closed at $40 a share.
Some analysts who follow ICN think that short sellers--aggressive market players who sell borrowed stock in hopes of buying it back later at a lower price--may have had a hand in the company’s latest round of troubles.
Increase in Short Selling
On Feb. 13, when it was first reported that trading in ICN shares was the target of an SEC investigation, the NYSE said ICN’s short interest--or the number of shares sold by short sellers--totaled a mammoth 2.99 million shares. Six months earlier, only 369,401 ICN shares had been shorted.
When short sellers are right and the shorted stock drops, they can earn a handsome profit. But if the stock goes up short sellers often get wiped out because they must eventually repurchase the shares at the higher price.
Considering the large number of ICN shares shorted, analyst Melnitchenko says aggressive short sellers may have been the ones who recently told Dingell’s committee that several cases of Virazole’s causing fluid retention and heart failure in infants went unreported to the Food and Drug Administration.
In addition to the side effects reported to have occurred in infants, the committee and the FDA are investigating allegations that nurses administering Virazole in aerosol form have suffered headaches, asthma and sore throats.
On Feb. 20, when published reports of the investigations appeared, ICN shares plunged $2.50 a share, or 13%, to close at $17 a share. Shares in the Viratek subsidiary fell $12.50 in heavy trading to close at $34 a share.
“I think that it was a set-up,” Melnitchenko said last week. “I hope Dingell’s committee looks into who made those allegations.”
Refuse to Comment
Energy and Commerce Committee staff members won’t discuss the investigation or the source of the allegations. FDA officials also declined to comment on the case, and ICN executives flatly refused to be interviewed.
However, the fact that Virazole--known generically as ribavirin--is associated with severe and sometimes fatal side effects is not news at all, said Faye Peterson, an FDA spokeswoman. Approved early last year as a treatment for respiratory syncytial virus--also called RSV--in infants and young children sick enough to require hospitalization, Virazole has been linked in rare instances to fluid in the lungs, cardiac arrest and even death, Peterson said. The drug also may cause birth defects if administered to pregnant women, she added.
In approving Virazole for severe RSV cases, the FDA required ICN to include warnings in the drug’s packaging cautioning doctors against the potential side effects. Indeed, the adverse reactions reported to the congressional committee occurred in children who require assistance in breathing. Virazole’s FDA-approved labeling explicitly cautions doctors against using the drug for infants requiring assisted breathing, Peterson said.
Labeling has always been a sticky point with the FDA. Last March, for example, the agency used its power over the drug’s labeling to force ICN to revise news releases that it said made false and misleading claims of safety and efficacy for Virazole.
In particular, the FDA objected to ICN’s claim that Virazole was so safe that it could be “administered to premature babies and to other high-risk patients with no adverse reactions.” The agency also criticized an ICN statement that clinical studies of the drug in aerosol form “failed to demonstrate any evidence” of significant side effects.
Studies Suggest Problems
“Indeed, there are studies that suggest that the product may have some rather serious side effects,” including severe breathing difficulties and death, FDA spokesman William Grigg said at the time. However, Grigg added: “It’s not clear whether those results came from the underlying disease or from the product itself.”
Despite the potential for side effects, doctors at several major hospitals contacted by The Times, including Johns Hopkins University Medical Center in Baltimore, San Francisco General Hospital, Childrens Hospital of Orange County and Stanford University Hospital in Palo Alto, say they have encountered no serious side effects in infants treated with Virazole.
“We’ve used a lot of the stuff over the last 15 months, and if there was a significant side effect, I’d have known about it and my staff would have reported it to the FDA,” said Dr. David Smith of Stanford’s pediatric department. “I am not aware of any problems.”
Dr. Gary Goodman, a pediatrician at Childrens Hospital of Orange County, is enthusiastic in his praise of Virazole. “We have been impressed with how free of side effects it has been,” he said.
Both doctors administering Virazole and securities analysts who follow ICN said that they have no idea who is the source of information supplied to the congressional committee.
But Mike Murphy, publisher of the Overpriced Stock Service, said the short sellers appear to be getting their information from doctors and clinicians who don’t like ICN.
Murphy, who recommends that investors short Viratek while buying ICN as a hedge, said that while Virazole’s potential for side effects is not news, there is nevertheless an ongoing campaign to disseminate that information.
“When there is bad news out, someone is calling and getting the news into the brokerage community,” said Murphy, who added that the dozens of short sellers who call him with the latest negative rumor always cite medical sources.
Although “there are a lot of short sellers out there” who would be willing to approach the congressional committee with information damaging to ICN’s stock price, Murphy says the fact that Rep. Dingell actually launched an investigation adds weight to the allegations that Virazole is a dangerous drug.
“I don’t think Dingell would go after it if his staff hadn’t looked into it,” Murphy said. “To do otherwise would make him look stupid.”
Allegations Not Ignored
NYSE officials refused to comment when asked about widespread speculation that short sellers fed the negative information to Dingell’s committee. An SEC official also declined to comment but said privately that the commission “would not ignore” such allegations.
Because Virazole is a potential AIDS medication, there is considerable speculative interest in ICN stock, as well as in shares of the company’s NASDAQ-listed Viratek and SPI Pharmaceuticals Inc. subsidiaries. Among Wall Street’s most volatile issues, all three of the stocks often bounce up and down several points within a single day on company news releases and bearish rumors.
Viratek manufactures Virazole, and SPI markets the drug. ICN owns substantial stakes in both companies and manufactures a broad line of 350 other compounds--mostly prescription dermatological products.
On Jan. 8, when ICN announced plans for a news conference to release results of clinical trials of Virazole on patients infected with the AIDS virus, ICN stock gained $3.125 in heavy trading to close at $25.25 a share. Viratek gained $3.50 to close at $76 a share. The results released the next day were promising, but apparently not as good as speculators had expected. As a result, ICN plunged $4 on volume of more than 3.3 million shares--or about 20% of the total outstanding stock--to close at $21.25 a share. Viratek fell $5, to $71 a share.
It was that drop in price that sparked the shareholder lawsuit filed Friday. The shareholder alleged that company executives were responsible for artificially inflating the price of the stock.
“It’s known as a speculative stock,” said analyst Melnitchenko. “That is why this is not a stock for conservative investors. This stock has a lot of potential for risk.”
Just how risky ICN stock is seems to be the central issue in a class-action lawsuit filed against PaineWebber by several investors who say they were led to the slaughter by the bullish research report and No. 1-rated “buy” recommendation issued by analyst Ronald Nordmann.
The report, issued on Aug. 12, less than a month after PaineWebber and E.F. Hutton & Co. co-managed offerings of $137 million in ICN debentures and stock, said Virazole “could become one of the largest selling drugs in the world,” particularly if approved for use against influenza.
In the week that followed, ICN shares jumped 67% in price to a new 12-month high of $34 a share.
Medical Skepticism
But within days of that peak, the stock plunged to $20 a share in a free-fall triggered by medical skepticism and several articles questioning Virazole’s potential in treating both AIDS and influenza.
In a lawsuit filed in federal court in New York, investor Joseph Carlin, who bought 2,000 shares of ICN at prices ranging from $31.50 to $29 a share based on PaineWebber’s recommendation, is accusing the firm of “inflating” ICN’s share price through a “false and fraudulent” research report.
Carlin also alleges that when PaineWebber was the lead underwriter in a public offering of 2.1 million ICN shares at $17.50 each, the firm bought nearly one-third of the stock, or 700,000 shares, for itself.
But the lawsuit apparently is not the only fallout from the Paine-Webber report. Shortly after the buying binge, the Securities and Exchange Commission reportedly began investigating possible illegal trading of ICN stock.
SEC officials, citing agency policy, refuse to confirm or deny those reports. But Larry Panitz, ICN chief administrative officer, was quoted in the Wall Street Journal as saying that the SEC probe is focused on PaineWebber itself.
Analyst Nordmann, who was temporarily reassigned on Aug. 22, the day PaineWebber downgraded its position on ICN stock from a “buy” to an “attractive,” would not comment about the reported SEC investigation or the lawsuit against his firm. PaineWebber officials also refused to comment.
Milan Panic’s brash and sometimes abrasive style is often blamed for the controversy that surrounds the company he started in 1959. Panic, who left his native Yugoslavia more than three decades ago, has a deep hatred for communism and a passionate love for Virazole.
But sometimes that passion can get ICN into trouble.
Last March, when the FDA chastised ICN for making allegedly false safety claims for its drug, the agency also rebuked the company for having “grossly exaggerated the efficacy of Virazole” in treating diseases for which it is not approved, including influenza, herpes simplex, chicken pox, measles and hepatitis A.
Warning From FDA
Although the drug is approved in several foreign countries for treating a variety of ailments, the FDA warned ICN against making claims of efficacy for any disease other than RSV, the only ailment for which it has FDA approval.
Since then, both Panic and ICN have been careful to avoid overstating Virazole’s potential, lest they draw the FDA’s wrath. Indeed, in an August interview with The Times, Panic went so far as to say that he had “no proof that our drug is effective against AIDS.”
Still, in unguarded moments, Panic can be a loose cannon.
For example, in late November, a Viratek shareholder filed a lawsuit seeking to prevent Panic and other company insiders from obtaining options to buy Viratek stock at $13.625--a steep discount from the then-current market price of $75 a share.
When asked by a reporter at the time if he and the other insiders knew when they voted themselves the options in April that Viratek’s share price was going to skyrocket within a few months, Panic became visibly agitated.
“When I started the company with $200, I had no idea that the company would find the cure for AIDS,” Panic replied. Startled publicity men spent the rest of the afternoon trying to explain to the reporter that Panic didn’t really claim that Virazole was a cure for AIDS.
