Analysts, Investors Watch for ICN’s Next Move as a Player in a Takeover

Analysts aren’t quite sure what to make of it, but investors are focusing increased attention on ICN Pharmaceuticals of Costa Mesa, which has emerged as a possible player in escalating drug industry takeover activity.

Giant Swiss drug maker F. Hoffman-La Roche & Co. announced last Monday that it planned a $4.2-billion takeover of New York-based Sterling Drug, which has spurned the unsolicited offer.

ICN has emerged as a player in the drama because its continuing purchases of shares in Hoffman-La Roche make it the Swiss company’s largest single shareholder outside the Hoffman family.

Speculation about possible interest on ICN’s part in acquiring control of Hoffman-La Roche increased last week when ICN disclosed that it had increased its ownership of Hoffman-La Roche’s voting stock to 7.3% from 6.3% in recent months.


As Much as 25%

ICN also reported that it has received clearance under federal antitrust laws to purchase as much as 25% of Hoffman-La Roche.

ICN stock closed Friday at $7.125 per share, up $1 for the week in heavy trading on the New York Stock Exchange.

Although many analysts are skeptical about suggestions that ICN might try to buy a majority of Hoffman-La Roche stock, a few believe that Hoffman-La Roche might have made its offer to Sterling in part to keep ICN at bay.


“I believe Hoffman is doing this as a defensive measure,” said Eugene Melnitchenko, a health care analyst at Eppler, Guerin & Turner, a Dallas-based brokerage.

Melnitchenko said he had reason to believe that ICN has already made a tentative offer to the management of Hoffman-La Roche, an international drug manufacturer firm best known as the maker of Valium.

Because Hoffman-La Roche has said that a majority of its 16,000 voting shares are “closely held” by family members and possibly their friends, the company would appear to be well protected against unwanted suitors. When ICN’s initial purchases were disclosed, family member Paul Sacher said “contracts” within the founding family “ensure the present ownership structure.”

But because Sacher is 81 and his wife Maya, widow of the founder’s son, is 90, analysts said there is concern about whether the elder family members can keep the current ownership structure intact and whether their heirs could be enticed into selling.

Under Swiss law, a hostile tender offer is not prohibited. In most cases, government approval is not needed for a foreign firm to purchase a Swiss company. There is no single agency, such as the U.S. Securities and Exchange Commission, that oversees corporate acquisition activity.

However, if more than a third of a Swiss company’s assets are in land or other property, a takeover must be endorsed by the government. That requirement is designed to keep foreigners from buying up Swiss property.

Although ICN was required to seek antitrust clearance from the Federal Trade Commission to increase its ownership of Hoffman-La Roche shares, the Swiss government does not require potential buyers to disclose their share purchases.

Several analysts said that it might cost more than $5 billion to acquire Hoffman-La Roche, and ICN’s existing debt load raises questions about its ability to raise that kind of money.


Trying to Create a Stir

In fact, some analysts suggest that ICN Chairman Milan Panic is simply trying to create a stir by announcing the share purchases in the midst of the Sterling Drug takeover battle.

Panic is no stranger to publicity. The Food and Drug Administration criticized Panic after he announced in a Washington news conference last year that the company’s primary drug, ribavirin, could be successfully used to delay the spread of AIDS in patients showing early signs of the deadly disease.

And company officials have confirmed that the SEC is investigating possible insider stock manipulation, inside trading and other matters involving ICN. The SEC, as a matter of policy, will not comment on investigations.

But some analysts said the investment in Hoffman-La Roche makes sense. “This is no stunt. He’s not doing this just for the hell of it,” said Craig Dickson, a drug industry analyst at Interstate Securities, a brokerage firm in Charlotte, N.C.

“He’s making an investment. And Hoffman-La Roche is a good investment,” Dickson said.

“The investment displays ICN’s value,” added Melnitchenko, speculating that if ICN doesn’t increase its stake, it might sell its shares back to Hoffman-La Roche or possibly offer them to Sterling.

Primary Concerns


No matter what ICN has in mind for its Hoffman-La Roche shares, the unusual investment isn’t necessarily the major factor behind recent investor interest in ICN stock.

Melnitchenko said the primary concern of ICN shareholders continues to be the company’s efforts to obtain federal approval of ribavirin as a treatment for patients with acquired immune deficiency syndrome, which has no known cure and has killed thousands.

The FDA, which placed what it called a “de facto clinical hold” on further human tests of the drug last April, lifted the restriction in October. And in December, the FDA gave the National Institutes of Health approval to start new clinical tests.

Melnitchenko said that 1988 will be the year that the drug receives “full approval” as a treatment for AIDS and several other diseases. He acknowledged that he made essentially the same prediction for 1987, but he blames the FDA for mishandling the approval process. He said evidence is “overwhelming” that the drug can be used to slow the spread of the disease.

For the company’s fiscal 1987 fourth quarter, which ended in November, analysts expect ICN to report a loss, largely because of declines in the value of the company’s portfolio of equity investments. Most stocks suffered in October’s worldwide market collapse.

“They made a big move out of bonds and into equities at the wrong time,” said Ken Bohringer, a drug industry analyst at Prudential-Bache Securities in New York.

'$1-Plus’ Earnings

Bohringer expects fiscal 1988 earnings of $11 million, or 65 cents per share. ICN has 19.7 million shares outstanding. “But I don’t have much confidence in those numbers. I haven’t looked at earnings potential lately,” Bohringer said.

Melnitchenko expects 1988 earnings of "$1-plus.” And “that could be a big plus, depending on approval of ribavirin.”

Approval of the drug as an AIDS treatment would obviously send the stock soaring, analysts said. In 1986 and 1987, investors bid up the stock on speculation that approval was imminent, but it plunged following last year’s FDA setbacks.

“A lot of investors just got worn out on it,” Bohringer said.

The stock was strong during the first week of 1988, trading as high as $8.25 per share compared to a 1987 close of $6.125.

“Investors took their losses at the end of 1988, and now they’re looking at it again,” Melnitchenko said.

He also said investors who took “short positions” in the stock--a speculation that the stock will decline in value--are having second thoughts or are covering their positions.

Melnitchenko recommends purchase of the stock, and Dickson, who also recommends the stock, said he is continuing to buy shares in the company.

But other analysts say the stock is too speculative to recommend. Nancy Moyer, a drug industry analyst at Ladenburg, Thalmann & Co., a New York-based brokerage, said she has stopped following the company.

“The company’s conduct has been promotional,” Moyer said. “I would prefer if they prove the drug first and publicize it later--and not unnecessarily raise the hopes of the desperately ill without proof that the drug works.

“Drug companies have a responsibility to the ill to treat them with respect.”

Times Bonn bureau chief William Tuohy contributed to this story.