ICN Shares Plunge as Investors Scoff at Spinoff of 2 Divisions

Reacting to shareholder pressure to enhance its stock value, ICN Pharmaceuticals Inc. said Thursday that it will reorganize operations, spinning off two units as publicly traded companies but retaining majority control in both.

The long-awaited decision disappointed investors, who had hoped the Costa Mesa drug maker would at least sell its European operations. Shares fell 20%--the stock’s biggest one-day percentage drop in five years--as investors and analysts scoffed that the change accomplishes little.

“They didn’t give us much to get excited about,” said Eric Miller, portfolio manager with Heartland Advisors Inc., ICN’s largest single investor. “It’s basically some convoluted financial engineering that leaves the basic corporate structure intact with no substantive changes.”

Allan S. Roness, director of research for JWGenesis Markets said: “The company is still the same except it is in three parts. If you add up the three parts, you don’t get more than the whole.”

Some dissident shareholders say they may seek to replace the company’s founder and chairman, Milan Panic, if he doesn’t act to make the units independent.

But Panic defended the reorganization and said time will prove the plan to be right.

“The stock market is not perfect short-term,” Panic said. “But what we are doing is correct. I am confident it will increase the stockholder’s value.”

The stock lost $6.81 to close Thursday at $27.50 a share on the New York Stock Exchange.

ICN has been facing demands from shareholders to spin off or sell its operations, particularly in Eastern Europe, where the company lost hundreds of millions of dollars because of the region’s economic and political volatility.

Those problems have been a drag on strong sales of ribavirin, ICN’s signature drug used in a combination treatment for the highly contagious liver disease hepatitis C. The European operation also has been cited as the reason ICN shares have languished the last few years. The stock has fallen about 32% since June 1998.

Under the restructuring, ICN will create Ribapharm Inc. as its research and development arm and fund it with the royalty stream from ribavirin, which made $110 million last year. Ribapharm, which will hold the patent to ribavirin, will take over ICN’s headquarters, and the parent company will move, probably to New York.

ICN will retain an 80.5% stake in Ribapharm and sell the remaining interest on Wall Street for what could be $250 million, an estimate used only to calculate the fee for filing Ribapharm’s initial public offering with the Securities and Exchange Commission.

One Unit Will Have Moscow Headquarters

The parent company also will create ICN International, to be headquartered in Moscow, to oversee Eastern and Western European and Pacific Basin operations. The new company’s shares won’t be traded in the United States. They will be listed on the Budapest Stock Exchange and, secondarily, on the London Stock Exchange.

Besides acting as the parent company, ICN Pharmaceuticals will oversee all operations in the Western Hemisphere, primarily North and Central America.

Panic, 70, a former prime minister of Yugoslavia, will remain chairman and chief executive of ICN Pharmaceuticals and will be named chairman of the two new companies.

ICN director David Batchelder said, however, that the board hasn’t approved Panic’s role with the subsidiary companies. He said he asked the company to clarify its announcement.

While ICN directors approved some elements of the proposal, they haven’t approved the management or composition of the boards for the subsidiaries, Batchelder said.

Miller at Heartland, which owns 5% of ICN, said the plan does not go far enough in addressing ICN’s biggest problems: public perception and perhaps Panic himself.

Panic has been plagued by a series of legal proceedings in recent years including a pending civil lawsuit filed by the SEC seeking to strip him of his right to serve as a corporate officer.

“They haven’t taken drastic enough steps to get over the credibility problems existing management has,” Miller said. “There’s a huge perception problem with Milan through various issues and litigation that carries some negative baggage.

“But he also has some extremely positive attributes, including how well-connected he is in Eastern Europe,” he said. “We were hoping Milan would spin off Eastern Europe and run those and have someone else come in and run the U.S. operations.”

Ralph Whitworth, whose Relational Investors controls about 2% of ICN’s shares, has said he would put up his own candidates to replace directors up for reelection if the board doesn’t take action that boosts the stock price. The annual shareholder meeting will likely be in September.

ICN did not have to restructure, according to analysts. But the opportunity to raise funds and the ability to streamline focus, as well as the influence of the investors, made the move appear attractive.

Also, dividing the company by its core operations could limit some of the risk the pharmaceutical company has encountered by operating in foreign markets, especially in Eastern Europe.

Panic said the restructuring will allow ICN to focus on core areas and will help to boost the company’s stock price, which he said is grossly undervalued in light of the company’s financial performance.

The plan was based on a recommendation by UBS Warburg LLC, the investment bankers hired by ICN in February to consider “all options” for the company’s Eastern European drug unit and its medical supplies group, which sells diagnostic products and chemicals.

“UBS said our performance was not transparent enough for investors to see,” Panic said. “It’s overshadowed. They said we have to make it transparent--that we are just as good as we were two years ago.”

Panic said he expects the restructuring to be complete by the end of the year.

Bloomberg News and Dow Jones contributed to this report.

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ICN Split

ICN Pharmaceuticals Inc. said it will restructure operations by the end of the year, splitting into the following separate companies:

Company: ICN Pharmacueticals Inc.

Headquarters: New York City (tentative)

Employees: 1,700

Operations: Eight manufacturing sites in the U.S., Canada, Mexico, Puerto Rico, Brazil and Argentina.

*

Company: ICN International

Headquarters: Moscow

Employees: 12,600

Operations: 13 manufacturing sites in Russia, Poland, Hungary, the Czech Republic, Montengenero, Macedonia and other countries in Europe and the Pacific Basin.

*

Company: Ribapharm Inc.

Headquarters: Costa Mesa

Employees: Fewer than 100

Operations: A library of 3,500 nucleosides; all research and development operations.

Source: ICN Pharmacueticals Inc.