Drug Firm Looks East for Opportunity : Pharmaceuticals: Costa Mesa distributor makes deal with Yugoslavia's largest drug and chemical manufacturer. It's among companies seeking Eastern European markets.

By LESLIE BERKMAN

Nov. 28, 1990 12 AM PT

TIMES STAFF WRITER

COSTA MESA —

By reaching from Orange County to Belgrade, SPI Pharmaceuticals Inc. is in the vanguard of U.S. pharmaceutical companies seeking to exploit new business opportunities in Eastern Europe.

SPI, a small Costa Mesa drug distributor, last week signed a definitive agreement to form a new joint-venture company with Galenika Pharmaceuticals, Yugoslavia’s largest drug and chemical manufacturer.

The venture is not the first and won’t be the last to bring Western pharmaceutical firms together with their Eastern European counterparts. Earlier this month, Sanofi, a French pharmaceutical firm, bought a 40% stake in Chinoin, a Hungarian drug company, for $75 million.

Other drug firms owned by the national governments of Yugoslavia and Hungary are also shopping for partners who can provide them with the capital, technology and business know-how they will need as their countries convert to free-market economies.

Western companies entering such partnerships anticipate that the combinations will give them an opportunity to sell their existing pharmaceutical products to a large and mostly untapped market in Eastern Europe, which has about 300 million people. Moreover, they are hoping to benefit from Eastern Europe’s tradition of scientific and medical research in developing new drugs.

Milan Panic, a native of Yugoslavia and chairman and chief executive of ICN Pharmaceuticals Inc., 89% owner of SPI, said he expects “significant marketing synergies to occur from the consolidation of our businesses.”

ICN’s hoped-for gains from the merger won’t come cheap. The agreement calls for SPI to invest $50 million in the joint venture, which will be called ICN Galenika. The capital will probably be used for the modernization of Galenika’s manufacturing plants.

But many U.S. pharmaceutical firms are not yet convinced that large investments in Eastern Europe are wise, said Harvey Bale, senior vice president for international affairs for the Pharmaceutical Manufacturers Assn. in Washington.

“You are not going to see a flood of acquisitions in Eastern Europe, particularly in pharmaceuticals,” Bale said. “You don’t have a stable enough economy to warrant massive investments.”

Among the problems that discourage such investment, he said, is the inability to convert most Eastern European currencies to U.S. dollars and weak patent protection laws in those countries.

Bale also said that while there is “good basic pharmacy science in Poland, Czechoslovakia and especially in Hungary,” some of the pharmaceutical companies there need to learn how to develop and market their products to meet standards required for marketing them in the U.S. and Western Europe.

However, ICN officials contend that Yugoslavia is a special case because its currency is traded outside the country and because it has greater experience with a market economy than other Eastern European countries that have been more dominated by the Soviet Union.

Bill MacDonald, ICN’s senior vice president of corporate development, said Galenika already has sufficient quality in its manufacturing, reflected by licensing agreements it has with major U.S. pharmaceutical companies, including Bristol-Meyers, to produce drugs in its plants. He also said that Galenika is exporting $60 million in drugs to the Soviet Union, India, Africa and other areas.

David Watt, ICN’s legal counsel, said Yugoslavia has taken steps to tighten its drug patent laws, which he acknowledged are much less stringent than in the United States. But he said that deficiency matters more to smaller pharmaceutical companies in Yugoslavia than to Galenika, which controls much of the nation’s market.

F. Richard Nichol, president of the Institute for Biological Research and Development, an Irvine drug development firm, praised ICN for being farsighted. “Overall, I think the move is smart because (it will give SPI) increased access to potentially valuable technology in Eastern Europe and a toehold in what should be a growing market by the turn of the century,” he said.

Nichol said a number of major pharmaceutical firms have sent teams of executives to the Soviet Union to study the prospects for establishing manufacturing facilities there.

Dr. Gary Neil, executive vice president of Wyeth-Ayerst Laboratories, the prescription pharmaceutical division of American Home Products, said he has reviewed several business proposals from Hungarian pharmaceutical firms.

“They are soliciting investment from Western companies up to and including actual purchase of the company,” he said, adding that his firm is not actively pursuing any of the ventures. “I think people making this kind of investment are betting that the (Eastern European) economies will improve and pharmaceuticals will become a larger percentage of their gross national product.”

Blanton Whitlow, vice president of the north Europe division of the Upjohn Co., a large pharmaceutical manufacturer based in Kalamazoo, Mich., said that company has a joint venture with another Yugoslav firm, Hemopharm, to manufacture Upjohn’s drugs in that country and a joint venture to manufacture its drugs in the Soviet Union.

In addition, Whitlow said, Upjohn nine months ago got approval to sell its drugs directly to customers--rather than to a government-operated purchasing agency--in Poland.

Partly because of its existing marketing and manufacturing arrangements in Eastern Europe, Whitlow said, Upjohn doesn’t need to buy into an existing foreign-held pharmaceutical company. Nonetheless, he said, Upjohn did consider buying an ownership position in Chinoin but withdrew after carefully studying the company’s product lines.

“We determined they weren’t going to be as exciting as they looked superficially,” he said.

Whitlow said while there are some good companies in Hungary, Yugoslavia and Poland, it is necessary to be selective and make certain that any acquisition “makes a good overall fit for your company.”

Zarko Petkov, executive director of the Yugoslavia Chamber of Economy office in San Francisco, said the merger between SPI and Galenika was “an absolutely good match” that “was achieved after lengthy negotiations where every detail was measured very precisely.”

He said two more Yugoslav drug firms that together export about $10 million in products a year to the United States are also looking for equity partners in the United States.

Petkov said he realizes that U.S. companies will not invest in such mergers unless they are confident they will make a profit. He said ICN Galenika will be closely watched in the pharmaceutical industry.

“I hope it will be successful and then it will be a reference to show to others,” he said.

EAST-WEST PARTNERS GALENIKA PHARMACEUTICALS

HEADQUARTERS: Belgrade, Yugoslavia

MANUFACTURING PLANTS: Nine plants in six Yugoslavian cities.

PRODUCTS: 250 prescription drugs.

SALES: $230 million (1990 estimate).

EMPLOYEES: 5,800.

MANAGEMENT: Dr. Velimer Brankovic, director general.

SPI PHARMACEUTICALS

HEADQUARTERS: Costa Mesa.

MANUFACTURING PLANTS: Five plants in Byron, Ohio; Mexico Cty; Montreal; Barcelona, Spain; The Hague, the Netherlands.

PRODUCTS: 300 prescription drugs; hard and soft contact lenses.