LAST STAND
Panic and ICN Gear Up for Second Proxy Battle
By VITA REED
Welcome to proxy wars, round two.
Costa Mesa-based drug maker ICN Pharmaceuticals Inc. and its colorful, combative Milan Panic are gearing up for a second battle in as many years with shareholders at odds with the company’s direction and reorganization plan.
The situation is set to crest at the end of May, when new directors are to be elected to ICN’s board.
As the skirmish heats up, Panic,the company’s founder, chairman and chief executive who turns 73 in late December,is moving closer to his ride off into the sunset.
The onetime prime minister of Yugoslavia started ICN in 1960 with $200 and has built it into a midsize drug maker with more than $850 million in revenue and a market value of $2.3 billion at recent check.
But some ICN investors believe the company could have a higher value and that Panic has dragged his feet on a plan to split ICN into three parts.
Earlier this month, ICN did launch a public offering of Ribapharm Inc., the company’s biotechnology unit that’s seen as the crown jewel of the breakup plan. Ribapharm raised $260 million and rose 8% in its first day of trading in a difficult market. ICN still owns about 80% of Ribapharm and plans to distribute its stake to ICN shareholders within six months.
In the runup to ICN’s May 29 shareholder meeting, both sides are digging in for what one institutional investor called “a fight for Milan’s life.”
After losing a proxy battle for director candidates last year, ICN’s management says it is confident it will prevail in this year’s brewing contest.
“We expect to win,” said Alan Charles, ICN’s executive vice president of corporate relations. “It’s more the issues than the candidates that are crucial here.”
A new group of dissident shareholders argues it has issues on its side.
“We don’t believe the company has proceeded either rapidly enough or in a manner that conforms to the spirit of the proposed restructuring,” said Tim Rankin, an assistant portfolio manager for Franklin Mutual Advisers LLC of Short Hills, N.J.
Franklin, part of San Mateo-based Franklin Resources Inc., and Westport, Conn.-based Iridian Asset Management LLC are leading this year’s proxy charge. As of April 9, Iridian and Franklin owned a combined 10% of ICN’s 83 million outstanding shares.
Panic himself is another issue for Franklin and Iridian. In a filing with the Securities and Exchange Commission, the two investors said, “We believe the continuing role and influence of Milan Panic in the management of ICN is viewed negatively by current and potential investors.”
Panic has held a tight grip on ICN and fought off prior bids to oust him. The Serbian native, who mixes continental charm with a fighting spirit that dates back to his days in Yugoslavia’s Nazi resistance, also has tangled with federal regulators and settled several sexual harassment suits.
“We believe (Panic’s) presence at the helm of (ICN), his dismissive attitude toward shareholders and his controversial reputation are among the chief reasons ICN’s market valuation lags those of its peers and fails to adequately reflect (ICN’s) fundamentals,” Franklin and Iridian said in their filing.
ICN points to its Ribapharm spinoff as evidence of its intent to restructure the company and reward shareholders. It also has changed the way the company is governed, according to Charles. Formal governance policies, including a nominating committee for directors, have been adopted, he said.
Iridian and Franklin contend the committee was formed only after word came that they planned to back a slate of outside directors.
The other issue for ICN is the company’s financial showing, according to Charles.
“This is not a turnaround company. This is not an insolvent company. This is not a company that’s going downhill financially,” he said. “It’s had fabulous (performance),six financial records were set at the end of 2001 and the value of the company keeps going up. One would think these are things shareholders would not want to endanger by overturning management.”
ICN last year lost a proxy fight to a shareholder faction that included Providence Capital Inc. of New York and Special Situations Partners Inc., an investment fund controlled by Swiss financier Tito Tettamanti, an outspoken critic of ICN’s restructuring plans.
Last year’s battle,which grew nasty in the days before the shareholder vote,resulted in the election of current ICN directors Ronald Fogleman, a former U.S. Air Force chief of staff, Edward Burkhardt, former chief executive of Wisconsin Central Transportation Co., and Steven Lee, chairman of Woburn, Mass.-based PolyMedica Corp.
The Iridian-Franklin alliance is backing: Richard Koppes, a former counsel at the California Public Employees’ Retirement System now at Stanford University Law School; Robert O’Leary, former chief executive of Santa Ana-based PacifiCare Health Systems Inc.; and Randy Thurman, chief executive of Viasys Healthcare Inc. of Conshohocken, Pa.
“We spent a considerable amount of effort trying to assemble a high-quality team,” Franklin’s Rankin said of the slate. “We looked for individuals with pharmaceutical and healthcare backgrounds, with corporate governance backgrounds, with a complete understanding of the situation at ICN and with strong enough wills to go in there and work as an activist board to correct the problems that we see.”
As of late last week, ICN hadn’t unveiled its slate of candidates. But the company has launched a campaign to support its slate and to tout its performance to shareholders.
According to Charles, the company plans to meet with larger shareholders, send letters to shareholders and run advertisements in the Wall Street Journal and Barron’s. Ads have run in those papers in recent weeks.
“It includes responding to mindless attacks,” Charles said of the campaign. “It’s not easy to drop everything you’re doing in a business and start doing this silly stuff.”
Franklin and Iridian said they plan to keep their efforts low-key.
“We have no intention of running a campaign in the press or a campaign that demeans the importance of this issue,” Rankin said. “We were disappointed in ICN’s action last year in regards to the proxy fight and the accusations they were slinging at the nominees of SSP. They have already run a fairly large number,I believe seven or eight at a minimum,of full-page ads, which we believe is a waste of shareholders’ money. In the past three weeks, they’ve run multiple ads,full-page ads, you can’t miss them.”
According to Rankin, Franklin and Iridian see Ribapharm’s public debut as a halfstep: “The important step is the ultimate spinoff of Ribapharm” to ICN shareholders.
The investors also take issue with Ribapharm’s close ties to ICN.
“We don’t believe that Ribapharm proceeded in the spirit of the agreement reached with SSP in October of 2000,” Rankin said. “In the proxy materials, we point to certain connections that we find between each of the seven directors of Ribapharm and Milan Panic, as well as certain relationships between Milan Panic and the originally proposed or currently existing executive officers of Ribapharm.”
Their conclusion: “So, while in name Ribapharm will be independent of ICN, in spirit we don’t believe that will be fully accomplished. We believe the only way that shareholders will realize the full valuation of Ribapharm is being completely independent of ICN and Milan Panic.”
ICN downplays the comments of the two investors, saying they’re in it for the short term while management has to take a longer view.
“In my view, what’s going on here is that you’ve got short-term institutional shareholders,the opposition sponsors have been shareholders of ICN for less than 10 months,who want a quick profit and want to just take the company and take the cash out of it and sell it on the auction block,” Charles said.
Charles called the investors’ strategy “a short-term and callously spirited endeavor which is going to hurt other shareholders. They see a cash cow here and want to send it to the butcher shop.”
The stakes are high. ICN’s board is slated to shrink from 12 directors to nine. If the Franklin-Iridian slate prevails, six of ICN’s directors will have been put up by dissident shareholders, while only three will be backed by management.
If that happens, Charles said: “Certainly, the future of the company would become rather unpredictable under those circumstances.”
“It depends on how those people vote and what they choose to do with the company,” he said. “Theoretically, they could,and this is what everybody’s afraid of,just sell off the company for short-term profit and not worry about growth potential. That’s the worst outcome.”
Charles said he couldn’t predict whether the Franklin-Iridian slate, if elected, would ally with last year’s dissident slate of Fogleman, Burkhardt and Lee.
“For the most part, (Fogleman, Burkhardt and Lee) have learned to be very supportive of the company and seen what a great performance record it has,” Charles said. “Frankly, I would be a little surprised if they went along with anything the new three wanted.”
Franklin and Iridian have been in touch with Special Situations Partners. But Rankin said, “We are not working with SSP in any way, shape or form.”
But Rankin did give credit to last year’s dissident shareholder movement.
“Special Situations Partners, obviously, laid the groundwork for this,” he said. “They struck an agreement in October of 2000 with the company. In that agreement, they established certain enforcement mechanisms.”
Specifically, Rankin cited a provision that has shrunk ICN’s board from an original 15 members to the nine it is set to have after next month’s shareholder meeting.
While Franklin and Iridian aren’t coordinating efforts with last year’s dissidents, Rankin said he does see his group’s candidates as kindred spirits with those elected a year ago.
“Because they didn’t believe that the company was proceeding with the restructuring in the manner in which they have promised, they ran a proxy fight last year,” Rankin said. “This year, we decided to step in and run a proxy fight and nominate a new slate of candidates that, if elected, will work with the nominees elected last year.”
Some may wonder if it is worth the fight for Franklin and Iridian. Why not take the money and invest in another drug maker with a valuation and management more to their liking? That’s not in the cards, according to Rankin.
“We are owners of the business,” he said. “We need to protect our interests. If you buy a home and a couple of months later you realize that you have termites eating away at the foundation, do you walk away from it? No,you hire an exterminator. Too many investors vote with their feet rather than doing the right thing.”
ICN is resigned to another bruising fight, according to Charles.
“No one here wants a proxy contest,” he said. “It’s expensive, it’s divisive and the worst part of a proxy contest is it distracts management from running the business. It looks like we’re going to have a contest, and it may take the same shape that last year’s did.”
Another issue to consider is what becomes of Panic. He has said he sees himself moving into “an honorary guy role” once the breakup of ICN is completed.
Panic is slated to be non-executive chairman of ICN Americas and chairman and chief executive of ICN International. Along with Ribapharm, those two companies make up the three parts of ICN’s breakup plan. ICN International, which has a separate board of directors and a prospectus filed for a listing on the London Stock Exchange, is set to become independent in early 2003, according to Charles.
“I’ve heard Mr. Panic say on more than one occasion that he’s tired of the pace of this activity and he wants to plan for his own retirement,” Charles said. “I think that we need to get through all this activity that’s going on (before) that is formalized. But I can tell you that he has been actively recruiting for potential successors.”
THE VALUE QUESTION
A look at ICN and other midsize drug makers
ICN Pharmaceuticals
2001 sales: $858 million, up 7%
2001 net profit: $64 million, up 29%
April 17 market value: $2.3 billion
Ribapharm
2001 sales: $144 million,
up 7%
2001 net profit: $72 million, up 12%
April 17 market value: $1.7 billion
Forest Laboratories
2001 sales: $1.2 billion, up 33%
2001 net profit: $215 million, up 91%
April 17 market value: $14 billion
Allergan
2001 sales: $1.7 billion, up 7%
2001 net profit: $225 million, up 5%
April 17 market value: $9 billion
King Pharmaceuticals
2001 sales: $872 million, up 41%
2001 net profit: $218 million, up 238%
April 17 market value: $8 billion
Watson Pharmaceuticals
2001 sales: $1.2 billion, up 43%
2001 net profit: $116, up 26%
April 17 market value: $2.6 billion
