SPI Pharmaceuticals, Yugoslavian Firm to Merge : Joint venture: The new company, to be called ICN Galenika, will be based in Costa Mesa and is expected to post annual sales of $370 million.
SPI Pharmaceuticals Inc. has signed a definitive agreement to merge with Yugoslavia’s largest drug and chemical manufacturer and will form a new company that is expected to have expected annual sales of $370 million.
Under the agreement announced Thursday, the assets of Belgrade-based Galenika Pharmaceuticals would be transferred to a new joint-venture company, ICN Galenika Inc., to be based in Costa Mesa. SPI will own 75% of the new company and Galenika Pharmaceuticals will own the remaining 25%, SPI officials said.
The deal, originally announced in February, is one of the biggest East-West transactions in Yugoslavia since the end of World War II, SPI officials said.
The deal will provide Galenika with capital needed to modernize equipment and improve its international marketing position, while helping the U.S. drug maker to expand into Galenika’s traditional markets in Eastern Europe and the Soviet Union.
SPI, which is 89% owned by ICN Pharmaceuticals Inc. in Costa Mesa, is also investing in experimental new drugs that will be developed at Galenika’s research institute. SPI hopes to save on product research and development expenses because labor costs are relatively inexpensive in Yugoslavia.
“This will open the two pharmaceutical markets of Eastern Europe and the United States to sell each other’s various products,” said John Giordani, ICN’s chief financial officer.
SPI makes about 300 pharmaceutical products and has nine manufacturing and distribution facilities in North and South America, Western Europe and the Middle East. The company expects to report sales of $140 million in 1990 and employs 1,600 people.
The government-owned Galenika, with 5,800 employees, will do an estimated $230 million in sales in 1990. It manufactures a variety of drugs that are sold primarily in Eastern Europe and the Soviet Union, but also in Africa, the Far East and some Western countries.
The merged firm will have 7,400 employees, 18 manufacturing plants and distribution facilities in both countries, and assets of approximately $245 million, SPI said. Altogether, the venture will manufacture and market some 600 prescription pharmaceuticals.
“Part of the plan for the joint venture would be to trade . . . our expertise and personnel,” Giordani said.
The agreement calls for SPI to invest $50 million in cash, in addition to unspecified properties, equipment and other technical and intellectual properties in Costa Mesa, for a total of $360 million. Jack Sholl, an ICN spokesman, said SPI will borrow the $50 million and is negotiating financing from an international banking syndicate.
“We expect significant marketing synergies to occur from the consolidation of our businesses,” said Milan Panic, ICN chairman and chief executive.
The merger is subject to approval by the Yugoslavian government and by directors of SPI, ICN and Galenika, officials said. Velimer Brankovic, director general of Galenika, was named president of ICN Galenika.
Sholl said the deal was made possible by changes in Yugoslavian laws in 1988, which allowed privatization of businesses in that country.
When the deal was first announced, analysts had expressed concern about whether SPI would be able to arrange a method for taking any profits gained through the venture out of Yugoslavia. ICN officials would not comment Friday on whether SPI will be able to convert its profits from the Yugoslav currency.
In April, ICN announced that it would sign the merger deal instead of SPI because of the possibility that the merger could interfere with SPI’s ability to raise capital. ICN said Friday that SPI’s needs for public capital will be satisfied for the next three years, so SPI was allowed to sign the agreement.
SPI’s reported net income for the first nine months ended Aug. 31 was $10.2 million, up from $9.2 million a year earlier. Galenika posted 1989 pre-tax profit of $18.2 million.
“The profits of SPI and that of Galenika would justify the debt . . . as long as the pharmaceutical market is stable. And the market should be stable in the next two years,” said Viren Mehta, a partner at Mehta & Isaly, a New York-based worldwide pharmaceutical research group.
“This should be favorable to SPI in the long term since globalization for any pharmaceutical company is necessary for good future prospects,” he said.
SPI stock, traded on the American Stock Exchange, closed Friday at $11.375 per share, up $1.50.
