After 9 Years, Suit Against ICN Nearing Trial
Virazole has been the wonder drug for ICN Pharmaceuticals Inc., but shareholders simply wonder if it’s ever going to be approved in the United States to combat any major illness.
Over the years, ICN stock has risen and fallen on news that Virazole was being tested or wasn’t being approved as a treatment for AIDS or the highly contagious hepatitis C liver ailment.
Now a group of shareholders is taking the company to trial Monday in New York City in a 9-year-old lawsuit that accuses the company of exaggerating the prospects for Virazole. The investors seek up to $300 million in damages.
The shareholders who bought stock in 1986 and 1987 when Virazole was being touted as a possible AIDS treatment claim that company insiders sold $18 million worth of stock before releasing information that Virazole’s prospects weren’t as rosy as they had been claiming in public.
The investors contend that ICN’s controversial chairman, Milan Panic, alone received $14.7 million on his stock sales.
“We don’t think the plaintiffs are entitled to $3, let alone $300 million,” said New York lawyer Arnold Burns, who represents ICN.
The case is the latest in a series of lawsuits and federal investigations involving ICN, Panic and other company officials that have come to a head this year. Panic is the target of a federal criminal investigation into allegations that he profited from a separate instance of insider trading in late 1994.
The case, which has outlived the original judge in charge of it as well as some of the plaintiffs and defendants, has been unusually prolonged by changes of venue, judicial delays, dismissals of the original lawsuit and filings of revised complaints, say attorneys.
Plaintiffs’ lawyers, working on contingency, received partial payment two years ago when ICN’s former underwriter, PaineWebber Inc., settled for $6.5 million. PaineWebber admitted no wrongdoing. The remaining defendants deny all charges.
Jury selection in the case against the remaining defendants begins Monday in New York before U.S. District Judge Kimba Wood.
The investors, believed to number in the thousands, bought stock from Jan. 7, 1986, to April 15, 1987, in one of the three former ICN affiliates: SPI Pharmaceuticals Inc., Viratek Inc. and the original ICN.
The affiliates, whose stocks traded separately at the time, shared interlocking boards and officers, with ICN’s founder Panic serving as chairman and chief executive of all three. The companies have since been merged.
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Shareholders allege that Panic and other officials lied to the public and securities regulators about the safety and effectiveness of Virazole. The drug, discovered in 1970, was developed at Viratek, manufactured by SPI and sold by SPI and ICN, plaintiffs say.
In 1985, Virazole was approved by the Food and Drug Administration as a treatment in an aerosol form for hospitalized infants with severe lower respiratory infections--a use which plaintiffs say is extremely limited.
Plaintiffs allege that in 1986 and 1987, ICN promoted Virazole as a drug that could treat a broad spectrum of viruses and specifically had the potential to treat AIDS.
They allege that the defendants hyped Virazole’s chances of success to protect their jobs, raise more than $350 million for the company and sell stock at “artificially high prices and reap enormous profits.”
The FDA informed ICN on April 13, 1987, that it had rejected its request to expand testing of Virazole on AIDS patients, citing insufficient evidence that the drug could help AIDS patients or stop the disease’s progress, according to court documents.
When the company released the news of the FDA rejection two days later, plaintiffs say, stocks of all three affiliates plummeted, ending the day far below their highest values in the preceding 15 months.
ICN stock had fallen to $11.125, compared with its 15-month high of $33; Viratek stood at $15, down from its $93 high, and SPI fell to $15 from its $41.50 high.
ICN, disputing the allegations against it, contends that evidence from the international scientific community has proven that Virazole is safe and effective for a broad number of uses.
Defense attorney Burns said that by 1986, 23 countries had approved the drug for a variety of diseases, including respiratory virus, flu, hemorrhagic fever, measles and mumps.
He said company officials had strong reasons for believing the FDA would approve Virazole as an AIDS treatment. He noted, too, that Ireland and Hungary have allowed it for that use, based on the same clinical data the company submitted to the FDA.
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The litigation began in 1986 with a shareholder lawsuit against ICN’s underwriter, PaineWebber, over alleged misrepresentations in reports about the company’s prospects. That suit was combined the following year with several related shareholder lawsuits against ICN and its affiliates.
After the PaineWebber settlement, remaining defendants are Panic; Adam Jerney, now ICN’s chief operating officer; Roberts A. Smith, a director and former executive; Weldon B. Jolley, a director and former ICN vice president, and Bryant W. Rossiter, a former executive who was not accused of insider trading.
The trial tops the stack of legal matters involving ICN and Panic that are mounting up this year.
The company and Panic are targets of another shareholder suit and investigations by a federal grand jury and the Securities and Exchange Commission involving a November 1994 instance of insider trading by Panic.
Panic sold $1.24 million worth of company stock after the company learned that federal regulators wouldn’t approve Virazole as a stand-alone treatment for hepatitis C. But it wasn’t until three months later that the company disclosed the FDA rejection. Both the company and Panic have denied any wrongdoing.
Earlier this year, the Internal Revenue Service demanded that Panic pay $951,000 in back taxes and penalties unless he could prove that he played an active role in managing his personal investment in San Diego hotel properties. Panic took the case to U.S. Tax Court.
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Shareholders vs. ICN
Here’s how the shareholders’ lawsuit against ICN developed:
1986
* January: ICN announces that tests indicate its drug Virazole may delay AIDS onset in people infected with HIV; AIDS researchers remain skeptical.
* July: PaineWebber, along with E.F. Hutton & Co, underwrites a $137-million stock and bond offering for ICN.
* August: PaineWebber analyst Ronald Nordmann issues bullish report on Virazole’s potential against flu and as an AIDS treatment drug, setting off a three-day buying frenzy that increases ICN’s stock 67% to $34 a share. It quickly plunges to $20 a share after medical skepticism is expressed and several articles questioning Virazole’s potential appear.
* November: Investor who purchased shares on PaineWebber’s recommendation files suit in U.S. District Court in New York accusing investment firm of inflating ICN’s stock through a false and fraudulent research report.
1987
February
* A published report says Securities and Exchange Commission began investigating trading in ICN’s shares after the August buying; the shares fall 13% to close at $17.
* Investor files class-action suit in Los Angeles against ICN and a subsidiary, Viratek, accusing it of fraudulently inflating ICN stock price and misrepresenting Virazole potential as possible AIDS medication; Chairman Milan Panic and key executives are named.
* March: Two more shareholders file class-action lawsuits against ICN and its top officials, making accusations similar to those in February suit.
* May: ICN is criticized before House subcommittee for providing allegedly misleading information to federal officials about Virazole’s effectiveness as AIDS treatment.
1991
* September: Class-action lawsuits filed in Southern California courts against ICN are consolidated with 1986 suit filed against PaineWebber in New York City.
* October: SEC sues ICN and Viratek, alleging securities fraud.
1996
* July: Stockholders’ class-action suit against ICN scheduled to begin Monday in New York federal court.
Source: Times reports; Researched by JANICE L. JONES / Los Angeles Times
