AN EMBATTLED CEO TAKES ON ALL COMERS.

Having the Yugoslavian government first default on a $173 million debt, and then seize control of a Belgrade manufacturing plant, would be a devastating blow to any U.S. CEO's business. For Milan Panic, chief executive of Costa Mesa, CA-based ICN Pharmaceuticals, impassioned political activist, and former prime minister of Yugoslavia, it was personal.

When the government of the Serbian emigre's homeland raided and forcibly nationalized ICN Yugoslavia - in which Panic's $838 million company held a 75 percent interest - in February, the U.S. State Department denounced it as retribution for his role as an ardent - and vocal - critic of Yugoslav President Slobodan Milosevic's regime and as a leader of the opposition group Alliance for Change. "It is clear the takeover was an illegal attempt both to silence Milan Panic... and to avoid payment of over $175 million owed to ICN Yugoslavia for medicines provided to the state health care system," read a U.S. State Department report in the incident's wake.

Wall Street, in turn, viewed the change in ICN's Eastern European fortunes as a potentially devastating blow. The unfolding saga of the crumbling Yugoslavian division, which had accounted for 27 percent of the company's gross profit in 1997, coupled with a ruble devaluation in Russia, where ICN holds a 23 percent market share, sent its stock price tumbling from $50 in May of 1998 to a low of $15 last fall.

Not one to shy away from a challenge, Panic, who at 15 fought in Yugoslavia's resistance army in World War II, responded to this setback by redoubling his efforts to unseat Milosevic, even as he moved quickly to refocus ICN. The drugmaker wasted little time taking a $230 million charge for its Belgrade plant in the fourth quarter of 1998, ridding the company of an accounting albatross. Panic then concentrated on ICN's remaining strengths, namely a lucrative licensing agreement with Schering-Plough to market ICN's ribavirin drug to Hepatitis C patients; nine pharmaceutical companies in Eastern Europe, including businesses in Poland, Hungary, and the Czech Republic; and expanding concerns in North America, Western Europe, and Asia.

Despite these efforts, subsequent quarter reports proved disappointing and ICN's share price continues to languish in the low 20s. Panic attributes the lag to Wall Street's inability to let go of the past. "Our ultimate performance has been totally overshadowed by the problems of Eastern Europe," he asserts. "Because of my background, we decided to look to the emerging markets in Eastern Europe, and Wall Street won't forgive this. We knew going in that there would be ups and downs in the short term. But this is a market with enormous potential and with probably better long-term returns than anything else we could have invested in. We have good drugs, and we have demonstrated that we can manage the major breakthrough - and that we know how to take stresses from a business standpoint. Yet the stock market is not so kind to us."

Panic isn't the only one frustrated by ICN's stock performance. Heartland Advisors and Relational Investors LLC, two institutional investors with significant stakes in ICN, have begun making their interests felt. Heartland, ICN's No. 1 shareholder, has gone so far as to publicly call for Panic's resignation. "The company is very much undervalued," says fund manager Eric Miller, who says shares should be trading at between $30 and $40. "We think much of that stems from the legal issues and clouds that seem to follow Milan."

Relational, a fund with a history of buying stakes in poorly managed firms and using corporate governance activism to turn them around, plans to prod for change from within. In August, ICN and Relational struck a deal. ICN named David Batchelder, a Relational partner and former lieutenant of the 1980s takeover firm T. Boone Pickens, to its board. Relational, in turn, signed a standstill agreement that forbids the company from raising its stake in the firm above 10 percent.

With the notoriously shareholder activist-oriented CalPERS the largest investor in Relational, Batchelder will likely be acting, in essence, as a proxy for CalPERS, which tends to take an aggressive stance with the management of companies in which it has a significant interest. Yet Batchelder downplays any suggestion of an adversarial stance. "We believe that the stock is materially undervalued," says Batchelder. "I hope to work with the existing board on taking actions to correct that.

"By Relational charter, we are prohibited from participating in control actions, such as leveraged buyouts, restructurings," he adds. "We have been quite successful working with minority board representation and using shareholder power to influence strategy. We have found that when boards are faced with difficult situations they will defer to those who have the most money up."

Will Relational join forces with Heartland in an effort to oust Panic? Not necessarily, says Batchelder, who sees his fellow shareholder's demand for the 69-year-old Panic's resignation as a call for action. "That proposal is a sign of frustration about underperformance in the market and the fact that the shareholders have not seen any evidence of succession planning," he says. "Our issue isn't primarily with Milan; it's with the business plan of the company. Shareholders see the substantial free cash flow generated by the royalty agreement with Schering and are concerned about how that capital will be reinvested."

Fueling that concern is Panic's determination to further expand ICN's holdings in politically charged regions, despite the Belgrade fiasco and subsequent first and second quarter losses in the Eastern Europe division of $2 million and $10 million respectively. A large part of Panic's game plan for the future involves plowing royalty revenue from Schering-Plough into financing research at its facilities in Russia, Hungary, Poland, and the Czech Republic, where there's a lot of advanced research talent available at a fraction of what it would cost in the U.S. Just last month, ICN bought a chain of 88 pharmacies in Russia- where the company already has five Russian factories and four distribution centers - for $7.5 million.

"Of concern is the amount of capital exposed in those countries and the assessment of the political risk that is associated with that capital investment," says Batchelder. "One of the reasons we wanted board representation is so that we can look at these things."

Yet, Eastern Europe may well be ICN's best shot at a crucial achievement - bringing its R&D pipeline up to speed. In the fast-paced, high-stakes pharmaceutical industry - much like Hollywood - a player is only as good as his last hit. "ICN's biggest challenge going forward will be producing the next home run," says Robert Wasserman of Southeast Research Partners, who notes that a new drug typically takes five years to develop and between two and three to get approved.

As a specialty pharmaceutical company, ICN's hits have historically come through acquiring drugs rather than developing them on its own - a strategy that will have to change if the company is to continue to grow. "The major pharmaceuticals are focusing on marketing drugs with more than $1 billion in sales; anything worth less is for sale," explains analyst Andrew Forman of Warburg Dillon Read, who adds that while this trend is largely responsible for the burgeoning specialty pharmaceutical segment, specialty drug makers can't survive solely on rejects from the likes of Merck and Pfizer. "Rather than investing in research, ICN has been spending to acquire products that they then sell, which is a bit like plugging the holes in a dike."

How ICN will fare in gaining FDA approval for treatments developed overseas remains to be seen. "You can't submit data from there to the FDA," acknowledges Panic, who anticipates major drug launches in 2003 that will catapult the company from its standing among peer specialty pharmaceuticals such as Pliva, Mylan Laboratories, and Teva Pharmaceutical into the big leagues. "But the most important thing is to discover the drugs, which can be done at a tenth of the cost in Eastern European countries. Then you can repeat the research necessary for approval here, or apply for E.U. approval. From a research standpoint, we plan to have a new Hepatitis C treatment in 2003 and we are also moving toward oncology and the cancer market. In 2003, we will face our creator."

In the meantime, Panic is working to even out ICN's share in global markets. "We're moving toward geographic expansion in areas we feel will provide the best return," he says. "In 1998, our revenue breakdown was: North America, 25 percent; Eastern Europe, 49 percent; Western Europe, 10 percent; Latin America, 10 percent; and Asia Pacific, 6 percent. Our target over the next two years is to grow in such a way that North America will be 35 percent of our revenues, Europe as a whole will contribute 35 percent, and Latin America and Asia Pacific will each account for 15 percent."

It's an ambitious plan, but ICN already has some key pieces in place. "The company is now in a good position from a cash flow standpoint," asserts Wasserman, who credits the revenue stream from the arrangement with Schering Plough - which markets Rebetron[TM], a combination of ICN's Rebetol[R] (ribavirin) and its own Intron[R] (alpha interferon) drug, as a combination or "cocktail" therapy hepatitis C treatment - for shoring up the company's industry position. "They're still ramping up ribavirin, which was approved for distribution in the E.U. countries in May. They've written off Yugoslavia, and they have leveraged their experience there in expanding into countries like Poland, Hungary, and the Czech Republic."

While Panic has failed so far to boost ICN's share price, overall, his efforts seem to have ICN's operations on the mend. In August, ICN reported solid second quarter performances in every market except Eastern Europe. U.S. revenues, bolstered by $26 million in royalties from Schering-Plough, saw a decline to $65 million from $66 million in 1998, but operating income, at $36 million, was unchanged. Western Europe saw boosts in revenue and operating income of 36 percent and 120 percent respectively; Latin America, 10 percent and 12 percent respectively; and the Asia, Africa, and Australia region saw a bump of 3 percent. While $353 million in total revenue for the first six months of 1999 is well below 1998's $474 million, net income tallied a respectable $48 million vs. a $64 million loss in 1998.

Still, he has yet to live down the foray into Eastern Europe. "At a pharmaceutical conference in May where we gave out awards to CEOs, he got the Napoleon Award for the fastest advance into and the fastest retreat from Russia," reports Forman, who notes that the award was bestowed and received in the spirit of fun, and reflects a certain admiration of the charismatic CEO's entrepreneurial verve. "He had the guts to go forward and then the wisdom to pull back, realizing that things weren't going to pan out."

That Panic has guts to spare is evidenced by his colorful and turbulent past. A cycling champion who defected from his native country while on tour, he arrived in the U.S. in 1955 with $20, and his wife and two children in tow. After attending and working as a research assistant at the University of Southern California, he launched ICN, which today markets and distributes 600 prescription pharmaceuticals in more than 90 countries, with just a $200 stake. "I thought that the industry wasn't productive and that I'd teach them," he recalls. "God knows, I didn't. But I learned how they did it. When you're young, you can make mistakes like that, as long as you are prepared to admit very fast that you made a mistake and change."

Throughout his business career, Panic retained an interest and involvement in the politics of his native land. In 1992, he asked for and took a leave of absence from ICN's helm to serve as prime minister of Yugoslavia, becoming the only U.S. passport holder in history to serve as the head of state of a foreign country.

Ironically, the same characteristics - entrepreneurial zeal and a passion for politics - that enabled Panic to launch and build an $800 million-plus drug company from the ground up are seen as a mixed blessing by industry observers. "His style is one that's been impulsive at times, which can allow him to seize opportunities while others have moved too slowly," says Forman. "He's made some good acquisitions, but may have jumped too soon with others.

"He has a big ego, and one country wouldn't be enough for him," Forman adds. "If there were a Mars or Venus market, he would want a plan to get there. Some investors feel he is either a risk beyond his entrepreneurial talent or so caught up in politics that he's not keeping his hand on the wheel of the company he's steering."

SHAREHOLDERS' PANIC ATTACK 

Ongoing legal woes may also be diverting Panic's attention. Multiple lawsuits have been filed against both Panic and ICN, forcing both to devote time and funds to fend off various allegations of personal and professional misconduct. Panic has been hit with sexual harassment charges by six different present and former employees. The cases proved costly, with Panic personally shelling out $3.6 million to settle a 1995 case brought against him by his secretary, Debra Levy, who claimed she was terminated after ending their affair. At least three other ICN employees also made harassment allegations, describing aggressive verbal and physical sexual overtures. Loyal insiders denounce the charges, claiming that Panic is merely the victim of women looking to profit from a sexual harassment-obsessed legal environment.

What's more, in August, the SEC filed a civil lawsuit charging ICN, Panic, and company executives with fraudulently misleading ICN investors. The suit alleges that ICN management failed to inform stockholders promptly when the firm's application to market ribavirin for hepatitis C was rejected by the FDA in November 1994. It's not the first time the SEC and Panic have locked horns. The SEC suit follows an earlier effort to charge Panic with insider trading - allegations later dropped - for an ICN stock transaction he made in 1994.

"While the SEC had been looking at the disclosure issues since the beginning of its investigation, we always saw the insider trading claims as the principal motivation for, and primary focus of, the SEC probe," says Arnold Bums, ICN's attorney. "Once the SEC was forced to concede that there was no insider trading case, it should have dropped the entire matter."

Instead, the SEC apparently switched gears, charging ICN and its top executives with fraud in a suit that, in addition to seeking monetary penalties of up to $500,000 from the executives named, seeks to bar Panic from serving as an officer or director of any publicly traded company. "To suggest that Mr. Panic is unfit to serve in a public company is a blatant example of the SEC's overreaching," asserts Bums, who says that ICN and Panic will "vigorously defend" the charges.

At the same time, Panic will have to placate disgruntled ICN shareholders and woo new investors into the fold, which may mean reexamining his leadership style. "The challenge he has as a leader is letting other people assume responsibility," says Forman, who says The Street's concerns may stem as much from Panic's reputation for being autocratic and impulsive as from an image tainted by the Yugoslavian debacle. "He's had a number of strong managers come and go. There's no clear successor and it's not certain that he wants one; which is an issue for some on Wall Street, because investors respect and admire his courage, but risk taking has to be tempered by good judgment and a strategic plan.

"When you buy ICN, you are taking a ride with Milan Panic, whether you want to or not," Forman adds. "It's like going down rapids in a boat - it's exciting, but if you're not careful you may fall off."