Unusual Public Tiff Roils ICN, Ribapharm

Last April 12, Dr. Johnson Y.N. Lau had every reason to beam as he rang the closing bell at the New York Stock Exchange.

At age 41, Lau was basking in the latest achievement of his already accomplished career as a medical scientist and researcher. Shares of his new drug company, Ribapharm Inc., had just finished their first day of trading on the Big Board, and the small firm’s future looked bright.

Only nine months later, Costa Mesa-based Ribapharm is in turmoil. Its short life as a publicly held firm soon could end. Lau is in danger of being fired -- that is, if he and other top Ribapharm executives don’t quit first.

The mess is the result of an escalating public feud between Ribapharm and ICN Pharmaceuticals Inc., itself no stranger to controversy. ICN had created Ribapharm, leased it headquarters space in ICN’s own home facility in Costa Mesa and sold 20% of the new company’s stock that April day.

ICN also had planned to spin off the remaining 80% of Ribapharm, making its progeny truly independent.

But ICN still hasn’t done so, and Lau and his team are infuriated that ICN is delaying. ICN, in turn, is angry at the way Lau and other directors of Ribapharm are running the fledgling firm. ICN already has moved to oust most of Ribapharm’s board -- including Lau.

Keeping the Ribapharm spinoff on hold is ICN’s new management, led by Chairman and Chief Executive Robert O’Leary, a longtime health-care executive. His team took over in June after a dissident investor group ousted founder Milan Panic, whose four-decade reign at the company was filled with unrest over his imperious management style and personal legal flaps.

The dissidents finally toppled Panic (pronounced pan-EECH), partly on the grounds that he moved too slowly to restructure ICN, including spinning off Ribapharm. Now, it’s the dissidents’ new management that’s being accused by Lau & Co. of dragging its feet on the issue.

The upshot is a relationship between a parent and its spinoff that has become extraordinarily turbulent.

Also notable is that their battle is being laid out in a volley of often bitter statements and news releases from both sides.

“It’s unusual for such a conflict to be fought out in public,” said Christopher Schulz, an analyst with the investment publication Spin-Off Report.

But both sides have a lot at stake -- namely, Ribapharm’s sole product: an increasingly popular drug called ribavirin that’s used for treating hepatitis C, a liver disease.

Ribapharm licenses ribavirin to Schering-Plough Corp., which sells the drug as Rebetol to patients in combination with two of its own medicines. Schering-Plough then forwards royalties from the sales to Ribapharm. Because Ribapharm is majority-owned by ICN, ICN consolidates those royalties into its own financial results.

And those royalties are crucial to ICN, which is struggling financially and burdened with debt. Ribavirin, in fact, is described by many as ICN’s “crown jewel” and probably is one reason O’Leary and ICN are having second thoughts about completely divesting Ribapharm, according to analysts.

ICN’s royalties from the drug account for nearly 30% of ICN’s total revenue, and “without the earnings contribution from Ribapharm, ICN is currently losing money,” Larry Smith of Gerard Klauer Mattison noted in a report two weeks ago.

For the quarter ended Sept. 30, ICN said its Ribapharm royalties more than doubled from a year earlier, to $63.4 million. That helped ICN report income from continuing operations -- excluding special gains and charges -- of $15.1 million, up from $10.3 million for the same period a year earlier.

For its part, ICN isn’t saying exactly why it has put the brakes on the Ribapharm spinoff. The company is “working through a number of issues,” including what to do with Ribapharm, and will decide “in an orderly and prudent fashion,” said Jeff Misakian, an ICN spokesman.

At the same time, O’Leary’s team has turned a harsh spotlight on Lau and Ribapharm, saying last month that the company’s directors had taken steps that had “caused us to lose confidence” in them. Among other things, ICN accused Ribapharm’s board of mismanaging the young business by arranging “highly inappropriate” bonuses and stock options for Ribapharm managers. The exact amount of the compensation wasn’t disclosed.

ICN then said it was going to fire Lau and four other Ribapharm directors Jan. 27 -- the earliest date possible under certain corporate restrictions -- to protect its investment in ribavirin. ICN also won a court order in Delaware, where both companies are incorporated, that prevents Ribapharm from taking any actions outside the “ordinary course of business.”

Lau and other Ribapharm executives shot back by saying that if ICN does oust the board members, they’ll quit and take with them nearly $5 million in severance pay. Ribapharm also said ICN’s statements about its compensation levels were “false and misleading” and that the pay packages weren’t unusual given Ribapharm’s success.

But above all, it’s the holdup on the spinoff that seems to have Lau most incensed.

Lau “had a strong commitment from previous management” at ICN that the complete spinoff would happen “and has a burning desire to create a biotechnology company bearing his imprimatur,” wrote Smith, the analyst. Lau’s group “may have decided to issue ICN an ultimatum that it must go ahead with the spinoff or he and his top managers would walk,” he added.

All of which leaves Ribapharm’s future an open question. If ICN does throw out Ribapharm’s directors, how soon would it replace them? Would ICN make a decision about spinning off the rest of Ribapharm before then, or after?

There’s also speculation that ICN might abandon the spinoff idea altogether and offer to buy back the 20% of Ribapharm held by the public to bring the company completely back into the ICN fold. But at what price? And would ICN, which already is heavily in debt, use stock or cash? ICN isn’t saying.

In the meantime, both firms’ stocks are under pressure. ICN shares, which stood above $33 a year ago, closed Friday at $11.35, down 14 cents, on the New York Stock Exchange. Ribapharm went public at $10 a share but closed at $6.52, down 3 cents.

ICN also faces another key question: If it fires Lau, would it jeopardize the success of Ribapharm and its lucrative drug?

Lau declined to comment, but he’s ready to negotiate a truce, said Ribapharm spokesman Joe Schepers.

“We would like to engage in a dialogue with ICN to work out what’s best for the shareholders,” he said.

Still, until detente is reached, Lau and the other Ribapharm directors have made it clear that they aren’t happy about being portrayed as reckless.

Ribapharm’s directors “aren’t some rogue group,” and “it’s not like we have a bunch of crazy people running around doing things,” Michael Steinberg, a lawyer for Ribapharm, told a Delaware judge last month. “As ICN acknowledges, we are their most important asset.”