Foundations' founder yet to donate $67-million

Last July, a Palm Beach billionaire philanthropist pledged to give an estimated $67-million worth of stock to charity in response to questions about his unusual stewardship of two tax-exempt nonprofit organizations.

Six months later, Jeffry M. Picower still has not made the donation, and his lawyer will not say when or how the publicity-shy financier plans to carry out his pledge. The stock will "go to charity, some charity" is all the lawyer, Barry Shalov, would say.

The stock is Picower's interest in a corporation that resulted from the June 1999 merger of two pharmaceutical companies he controlled. The complicated business deal put Picower in a position to profit personally from drug research funded through two nonprofit organizations he founded.

The deal's benefits for Picower's nonprofit organizations, however, were not so clear. The Florida-based Picower Foundation and the New York-based Picower Institute for Medical Research ended up with a reduced stake in any future profits from the pharmaceutical research they had helped to fund.

Meantime, Picower has shut down the Picower Institute, his nonprofit medical research institute that was a subject of a St. Petersburg Times investigation last July. The Picower Institute, in Manhasset, N.Y., officially closes Dec. 31, according to Shalov and departing institute employees.

The July story examined the close connection between Picower, his $658-million charitable Picower Foundation, his nonprofit Picower Institute and Cytokine PharmaSciences, the for-profit pharmaceutical company that resulted from the merger.

Pennsylvania-based Cytokine PharmaSciences licensed many of the most promising medical patents developed by Picower's nonprofit research institute. The institute, in turn, was funded in large part by Picower's tax-exempt private foundation, one of the largest in Florida.

Tax-exempt private foundations are a $390-billion sector of the economy. Donors to foundations can deduct the amount of their gift from their taxes. But the Internal Revenue Service audits fewer than 1 percent of private foundation returns. In 1998, the tax agency examined 191 of 61,185 returns filed.

With little chance of scrutiny, Picower operated in a manner that critics said created a conflict of interest between his charitable organizations and his for-profit business goals.

Described in court testimony as a "very sophisticated investor" and hardball businessman, Picower, 59, splits his time between an $8.7-million home in Palm Beach and an office in New York City.

Now, with the Picower Institute for Medical Research closing, ownership of many of its most promising scientific patents will go to Cytokine PharmaSciences, Picower's for-profit pharmaceutical company, said Kirk Manogue, a departing vice president of the institute. Cytokine PharmaSciences had previously held only a license to the discoveries.

A tax lawyer said the deal will likely comply with tax laws if Cytokine Pharma-Sciences pays "fair market value" for the patents. Otherwise, Picower could receive an indirect financial benefit from his charitable foundation, which would violate tax law and trigger financial penalties, said Marcus Owens, former head of the IRS tax-exempt organizations section.

How much the institute receives for its patents is a question of public interest. When it closes Dec. 31, the Picower Institute must by law disperse its assets to another charitable organization. The amount of money it will have to pass on to other charities will depend on the size of the payment received for its patents.

Among the discoveries registered by the Picower Institute are several patents for a molecule named CNI-1493. The drug has shown promise in treating inflammatory bowel disease, arthritis and multiple sclerosis. A German pharmaceutical company has licensed rights to develop the drug for treatment of HIV.

A former Picower business associate, Dr. Glenn Rice, said in July he once told Picower the drug has the potential to post $1-billion in annual sales.

When asked the fate of CNI-1493, the institute's Manogue said, "I think it will end up being assigned to the licensee (Cytokine PharmaSciences). There will be a business arrangement."

Details of that business arrangement could not be learned. Picower declined to speak to the Times. The chief executive officer of Cytokine PharmaSciences hung up the phone when contacted for comment. The chief operating officer of the Picower Institute, Elaine Jones, referred all questions to Picower's attorney, Shalov.

Shalov declined to discuss the matter.

It is unclear whether Picower's pharmaceutical company will obtain sole ownership of CNI-1493. A New York hospital affiliated with the institute is also claiming ownership. The dispute centers on whether the scientist who discovered CNI-1493, Dr. Kevin Tracey, worked for the hospital or the institute at the time of his discovery. In June, Tracey declined to speak with the Times, saying he feared a lawsuit.

Tracey did not return a recent phone call, but U.S. Patent and Trademark Record Office records show that at least one of several patents relating to CNI-1493 has been assigned to North Shore Long Island Jewish Research Institute, an affiliate of North Shore University Hospital.

Picower came into position to benefit personally from ownership of CNI-1493 in 1999 with the merger of two for-profit pharmaceutical companies he controlled.

One company was named Cytokine Networks, and it was owned by Picower's nonprofit organizations, to which any profits from the sale of a potential blockbuster drug like CNI-1493 would flow. Cytokine Networks originally held the license to CNI-1493 and other discoveries.

The other company, PharmaSciences, was owned primarily by Picower.

In July, Shalov said Picower "didn't negotiate the merger" of the two companies. However, subsequent briefs filed in a lawsuit in a Delaware chancery court indicate Picower had near total control over a deal that pitted his personal financial interests against the financial interests of his nonprofit organizations.

"Mr. Picower dominated the board of directors" of PharmaSciences, wrote the lawyer for Kerry P. Gray, a former PharmaSciences executive who is battling Picower over how to value his shares.

The merged company was named Cytokine PharmaSciences. Now, Picower personally owns 47 percent of the new company while he controls most of the rest of the shares through his nonprofit organizations and other entities.

In his lawsuit, Gray says that Picower's business strategy is to build up Cytokine PharmaSciences for lucrative sale or initial public offering of its shares.

Ownership of CNI-1493 increases the value of Cytokine PharmaSciences. But by combining the companies, Picower diluted his nonprofit organizations' share in any potential profits from 62.5 percent to 24.5 percent.

Picower's stake in the merged company is hard to assess because the company is not publicly traded. However, a Merrill Lynch report once valued Picower's shares as high as $67-million.

These are the shares Picower pledged, but has not yet given, to charity.

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