Panic gone, new ICN team finds finances in disarray. (Investments & Finance).

WITH the controversial Milan Panic gone, the new management of Orange County's ICN Pharmaceuticals Inc. must pick up the tattered pieces, which include a second-quarter earnings warning and a projected sales shortfall.

The place is in worse shape than the incoming team had expected.

"All options are on the table with one exception - the sale of the company," interim Chief Executive Robert O'Leary said. "The challenge for us as board members was - and still is - to instill investor confidence in what is basically a sound business."

ICN's turnaround plan includes:

* Retaining Goldman Sachs to work with board members, including O'Leary, on how to unlock value.

* Tapping an "internationally renowaned management consulting firm," according to O'Leary, to help the board figure out the best way to organize the company.

* Finding a permanent chief executive.

Goldman Sachs is expected to consider whether ICN should spin off some of its international and other business units and will take a close look at Ribapharm Inc., ICN's biotechnology unit. In April, ICN spun off 20 percent of Ribapharm's shares in a public offering.

"Ribapharm will be a key part of their assessment," a company source said. "Should we spin the remainder of it off? Should we leave it as is? Should we bring it back into ICN? There is no preconceived notion."

Weak stuck showing

The company was seen as a jewel by analysts because of its pipeline of 3,500 modified DNA compounds, as well as its ribavirin drug, part of a popular hepatitis C treatment sold by Schering-Plough Corp.

But Ribapharm was trading at $4.80 a share last week, down from its offering price of $10. The weak stock showing comes despite the company's expectation that it will meet or exceed consensus earnings estimates for the June quarter.

Ribapharm's market value of $885 million at recent check was higher than ICN's $815 million, a fact that surely isn't lost on ICN management.

The company could face major heat for the behavior of management under the leadership of Panic, ICN's founder and now-retired chairman and chief executive. Panic was forced out after losing a proxy battle for ICN's board in May.

"There is likely to be lots of ugly news through the balance of this year," D. Larry Smith, a managing director at Gerard Klauer Mattison & Co., said in a research report.

One of the concerns: cash bonuses paid to ICN management in connection with the Ribapharm offering. Smith also said the "appearance that earnings per share may have been artificially inflated to help old management in its unsuccessful fight to fend off dissidents" could attract a flurry of lawsuits and media scrutiny.

In his report. Smith estimated that cash paid out to ICN's former management is "well over" $125 million and that total expenses related to the Ribapharm offering and other debt-related issues is $250 million or more.

O'Leary said ICN has formed a committee to deal with "historical issues." He said committee members were "not affected by past cash bonuses."

And despite his concerns, analyst Smith isn't giving up on the company. "There is too much value in ICN, in our opinion, for investors to walk away," he said.

Financial morass

ICN's new board is taking its steps after it revealed earlier this month that its earnings results in the June quarter wouldn't meet Wall Street expectations.

Incoming directors, according to the source, "were certainly concerned about the quality of the company's financials, but they had no idea of the magnitude" of the problems. They now believe that it's going to take some time to ease ICN out of its financial morass, the source said.

Investors hammered ICN's stock three weeks ago after the company said it would post a loss, excluding one-time gains and charges. Analysts had been expecting a profit. Full results will be released Aug. 7.

ICN's woes are a result of fewer drug and medical device sales to its wholesalers, who already hold too much inventory. High research and development costs also are blamed for the earnings shortfall.

The drug maker's stock was more than halved from its previous level of $20 and hasn't recovered much following the news.

"The fundamentals of ICN's business remain strong," O'Leary said at the time of the shortfall announcement. "This is a profitable business with a strong product line that produces excellent cash flow."

ICN's earnings bomb comes after dissident shareholders had characterized the drug maker as a good company with poor management. A key running plank for the group was ridding ICN "of the depressing effect of Milan Panic's leadership."

Dissidents contended that the leadership of Panic, a former Yugoslavian prime minister who founded ICN in the early 1960s, kept the drug maker's market value down. They also alleged that Panic was slow to act on a plan to split ICN into three separate companies.

[GRAPH OMITTED]

Stock Prices

July 23, 2001  $29.65
July 23, 2002   $8.49

Note: Table made from line graph
ICN Pharmaceuticals Inc.

YEAR (Dec. 31)                 2001    2000

Revenue (millions)           $858.1  $800.3
Total Expenses (millions)     668.8   616.3
Operating Income (millions)   189.3   183.9
Net Income (millions)          85.2    93.4
Earnings Per Share            $0.77   $1.10

RELATED ARTICLE: SUMMARY

Business: Pharmaceuticals

Headquarters: Costa Mesa

CEO: Robert W. O'Leary

Market Cap: $818 million

Dividend Yield: 3.15%

Total Liabilities: $943.6 million

P/E Ratio: 8.72

Long-Term Debt: $734.9 million

Watch Those Dividend Yields

STOCKS are front-page news. Not front page of the business section, but front page as in page one of the A section, with prominent placement above the fold.

Whether quantifying the carnage, detailing the human toll or polling the pundits for something pithy, the press has latched onto the market's relentless slide as the major news story of the day.

Assigning blame is becoming a popular sport. The media are gunning for the Bush administration's economic team for its lack of leadership. Federal Reserve Chairman Alan Greenspan has lost his magic touch, according to some accounts, since his upbeat comments about the economy and corporate profits last week failed to stanch the bleeding.

Is all the focus on the stock market a sign that the end is near? To the extent that press reports -magazine covers, for example -- are an indicator of psychology and hence a contrarian indicator of the trend, it would appear to be so.

Indeed, the recent media focus on the stock-market rout is "potentially very bullish," says Paul McCrae Montgomery, a money manager and market analyst at Legg Mason Wood Walker in Newport News, Va., emphasizing the word "potentially."

Montgomery, who uses a full plate of technical, fundamental and psychological indicators to tell him when to buy and sell, says the stock market "is oversold enough, and people are discouraged enough, to attract new buying. These conditions are a necessary but not sufficient condition for a rally," he says.

What's really key to stabilizing the stock market is a recalibration of the relationship between stocks and bonds.

During the 1990s, the ratio of the bond yield to the stock dividend yield got way out of whack, topping out in the spring of 2000 at 5.86 to 1, according to Montgomery. The dividend yield, or the ratio of dividends to the stock price, was miniscule during the boom.

The ratio "has since fallen to 2.82 to 1 as of Friday's close - a 51 percent decline," he says.

In assessing the "proper" level for the ratio, Montgomery stresses that it is a variable, not a constant. Historically, bond yields have exceeded dividend 'yields by only 1 1/2 to 3 times, according to Montgomery, who tracked the ratio back to 1871.

Since the bond/stock ratio peaked in 2000, the Standard & Poor's 500 Index has fallen 45 percent, suggesting "fundamentally, at least, the grotesque capital marketplace anomalies of 1995-2000 have very largely been corrected,". Montgomery says.

The synchronous decline in the bond yield/stock yield ratio and S&P 500 also means something else, according to Montgomery.

It means that the entire decline in the stock market could have been anticipated. In fact, "a successful approach to the stock market could have ignored the economy, ignored the. Fed, ignored corporate governance, ignored accounting issues, even ignored earnings and interest rates," he says.

If the press ignored all that, what on earth would we write about?

Caroline Baum, Bloomberg News