Exhibit 2
The Board of Directors cc: Mr Benjamin D. Lorello
ICN Pharmaceuticals, Inc. Head of Healthcare Corp. Finance
ICN Plaza Warburg Dillon Read LLC
3300 Hyland Avenue 299 Park Avenue
Costa Mesa, CA 92626 New York, NY 10171
Attn : Mr Milan Panic, Chairman
13 June, 2000
Gentlemen,
ICN Pharmaceuticals Inc ("ICN" or the "Company") announced on 24 February 2000
that it had engaged Warburg Dillon Read ("WDR") to explore strategic
alternatives in order to increase shareholder value and that WDR would focus on
the possible disposition of ICN's Eastern European operations and the three
businesses of ICN's Biomedicals group. The results of WDR's analysis have not
yet been announced - almost four months later - but speculation as to the
outcome of this report(1) has fueled a sharp increase in the share price. We are
concerned that this recent strength in the share price could prove to be fragile
if the conclusions of the report do not meet the market's expectations.
As you know, we believe that ICN's share price does not reflect the intrinsic
value of the Company, even after the recent run-up in the share price. One of
the reasons we have identified is that ICN's Russian and Central European
business (the latter now combined with Western Europe) is not appreciated by the
market, even though this is undoubtedly a valuable strategic asset.
Conceptually, ICN may be viewed as being made up of three main components:
o A royalty stream derived from sales of Rebetron by Schering Plough;
o The above-mentioned European division (including Western Europe,
Central Europe and Russia); and
o The remaining Specialty Pharma business, consisting mainly of North
America and Latin America.
To complete the picture, ICN is developing two follow-on products to ribavirin
(Levovirin and Viramidine), which should be of interest to any one of the large
interferon manufacturers. ICN has recently hired a team of senior scientists to
develop its library of over 5,000 nucleoside analogs, and is building up its
pipeline of new products.
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(1) See Bloomberg Business News (31 May 2000).
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Each of the above-mentioned three business segments is very different from the
others and has features which some institutional investors or potential
corporate acquirors may find attractive and other features which they may find
unattractive.
For example, we believe that the European business on its own will be attractive
to certain specialist funds or companies wishing to expand in Eastern Europe,
but could be a source of concern for investors wishing to invest primarily in an
American specialty pharmaceuticals company. Similarly, the Specialty Pharma
business, which is a relatively mature business, will possibly be of greatest
strategic value to companies wishing to gain critical mass in the North American
market or seeking to acquire an existing sales and manufacturing infrastructure,
whereas the royalty stream could be of greatest value to a biotech company
wishing to use the substantial cash flow to fund R&D.
The following is a sum-of-the parts valuation extracted from a report by Salomon
Smith Barney(2) based on estimates for the year 2000 (sub-totals added by the
undersigned):
<TABLE>
<CAPTION>
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2000E Revenue Op. Income Pretax Net Inc. EPS P/E Value
/Share
<S> <C> <C> <C> <C> <C> <C> <C>
Royalty 124.2 123.0 123.0 94.8 $1.15 30.0 $34.47
Eastern Europe 220.2 39.2 4.3 2.6 $0.03 10.0 $ 0.32
Western Europe 135.9 36.7 15.1 11.6 $0.14 15.0 $ 2.12
----- ----- ----- ----- ----- ------
356.1 75.9 19.4 14.2 $0.17 $ 2.44
North America 234.5 117.3 87.6 67.6 $0.82 20.0 $16.38
Latin America 117.6 38.8 20.1 15.5 $0.19 10.0 $ 1.88
Rest of World 79.8 20.0 7.3 5.6 $0.07 10.0 $ 0.68
----- ----- ----- ----- ----- ------
431.9 176.1 115.0 88.7 $1.08 $18.94
Total 912.2 375.0 257.4 197.7 $2.40 $55.85
------------------------------------------------------------------------------------------------------------------
</TABLE>
Source: Salomon Smith Barney
We believe that the royalty income in 2000 will be substantially higher than the
$ 124.2 million indicated above, as do a number of prominent Wall Street
analysts(3), whereas the estimates for North America appear to us to be on the
high side. As to the European division estimates, the sales and operating income
are broadly in line with our own estimates, but we would argue that
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(2) Salomon Smith Barney report on ICN Pharmaceuticals, Inc dated June 1, 1999
(page 15).
(3) See Chase H&Q report dated March 6, 2000, which assumes royalty income of $
162 million in 2000 valued at a P/E of 30x , or $41/ ICN share for the royalty
stream alone (page 18).
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the valuation shown is too conservative since the transition from $ 75.9 million
of EBIT to $14.2 million of net income assumes over $60 million of deductions
for interest, tax and/or currency adjustments in Europe which appear not to be
warranted on the basis of information contained in ICN's first quarter financial
statements.
To summarise, we believe that a sum-of-the parts valuation in excess of $ 50 per
ICN share is realistic.
However, in order for this to be achieved, we believe that the different parts
need to be separated and allowed to trade as truly independent entities.
In view of the above mentioned considerations, we hereby propose to you that the
Company create two new subsidiaries with independent Boards and management:
o one to own ICN's European assets, including Western Europe, Central
Europe and Russia ("European Newco"), and
o the other to own ICN's Specialty Pharma division, including North
America, Latin America and ICN's exports to the rest of the world
("Specialty Pharma Newco")
and that 100% of the stock of these two newly created subsidiaries be
distributed to ICN's shareholders as a special dividend.
This would leave ICN as a truly research-driven pharmaceutical company, with its
existing pipeline including Levovirin and Viramidine, its library of over 5,000
nucleoside analogs and, of course, the royalty stream with which to fund a major
increase in R&D(4).
ICN's shareholders would, following completion, own shares in each of the three
publicly traded companies - ICN, European Newco and Specialty Pharma Newco - and
could then increase or decrease their holding in each according to taste.
Finally, there are two technical aspects which would need to be dealt with in
advance.
First, ICN's Senior Notes would need to be refinanced, repaid or the Indenture
renegotiated in order to permit a substantial dividend. The combined cashflow of
the three companies will be broadly the same as that of ICN in its current
configuration, so we see no reason why the existing debt should not be
reallocated amongst the three companies, or at least between ICN (ie the royalty
company) and Specialty Pharma Newco. In fact, the elimination of the Russian/
Eastern European credit risk(5) could result in a credit rerating. Should ICN
wish to reduce its debt, one solution might be for the Company to sell a
minority interest in one or other of the new
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(4) ICN would still also own the Biomedical group, which is small in the context
of ICN's existing business, but could prove to be useful in demonstrating
continuity of a trade or business for tax purposes.
(5) "The likely near-term announcement regarding the possible sale of Russian/
Eastern European or Biomedical operations should lower the risk profile and
focus attention on this undervalued company" (Donaldson, Lufkin & Jenrette, 20
March 2000).
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subsidiaries - to the public or by means of a private placement - immediately
prior to the proposed special dividend. But in any case, based on the advice we
have received from our investment banking advisors, the Senior Notes should not
prove to be an obstacle to the proposed transaction.
Secondly, the transaction needs to be structured in a tax-efficient manner. This
appears to be eminently possible. From the (inevitably) limited information
which can be gleaned with respect to this issue from ICN's publicly filed
documents, it appears that a tax-free spin-off of each of European Newco and
Specialty Pharma Newco could be achieved in a manner that defers tax both for
ICN and for its shareholders under Section 355 of the U.S. Internal Revenue
Code. Generally, assuming proper corporate-level business purpose (which we
believe would be present in this case (6)), a corporation such as ICN may
achieve a tax-free spin-off of a subsidiary if each of the subsidiary being spun
off and the distributing corporation have conducted an active trade or business
for at least five years and continue to conduct that business after the
spin-off.(7) With one relatively rare exception(8), if a trade or business is
acquired by the distributing or the distributed corporation(s) within the five
year period, it will not have been held for this purpose "for at least five
years". However, the objective in such cases is to ensure that the distributing
and distributed corporations each have had at least one significant trade or
business for the past five years.
The spin-off we are proposing should satisfy each of these two tests. First,
given ICN's history of research activity, which extends well beyond five years,
its product pipeline, its now quite substantial research staff, and the growing
stream of royalty income, we believe that the distributing corporation (ie ICN)
should qualify as an active trade or business, both before and after the
spin-off. Secondly, the other two units - European Newco and Specialty Pharma
Newco - are clearly active trades or businesses that have been conducted for
more than five years. This is not negated by the fact that significant assets
have been acquired by ICN within the past five years in what we presume were
taxable transactions, since these were all related to ICN's core business, which
has not changed in the last five years.
Accordingly, it appears on the basis of the available information that each of
the two units to be spun off - European Newco and Specialty Pharma Newco - could
be separately spun off from ICN without generating current tax to ICN or to its
shareholders.
We believe that the above-mentioned proposal, which would involve radical change
for the Company, has the advantages of creating substantial additional value for
shareholders, immediately, on a durable basis, and with relatively low risk.
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(6) This is due to the need for specific focus in each business unit, which
would be assisted by separation of those units.
(7) In addition, certain other technical tests relating to control, and the
requirement that the division not have been used as a dividend substitute, inter
alia, apply, all of which the proposed spin-off would appear to be capable of
satisfying.
(8) This exception applies where the acquired business was acquired pursuant to
a completely tax free transaction.
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We would like to work cooperatively with the Company to develop this proposal
further and would be pleased to answer any questions you may have. However, we
believe that time is of the essence to create shareholder value, and if progress
is not made quickly, we believe that this proposal should be considered by the
shareholders at the upcoming annual meeting that we understand you plan to hold
in September, as you did last year.
We would have preferred to have kept this proposal confidential at this stage,
but have been advised that we are legally required to disclose it in our
Schedule 13D filed with the SEC.
Yours sincerely
Dr Tito Tettamanti Eric Knight
Chairman Managing Director
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