SPI Signs Deal to Buy 75% of Russia’s Oldest Drug Company : Merger: Costa Mesa-based pharmaceutical firm says agreement to take over bulk of St. Petersburg-based entity should be completed in January.
SPI Pharmaceuticals Inc., continuing its expansion into the potentially lucrative Eastern European market, said Wednesday that it has signed an agreement to buy a controlling stake in Russia’s oldest drug firm.
The deal with the St. Petersburg-based Leningrad Industrial Chemical and Pharmaceutical Assn., or “Oktyabr,” marks the second time in two years that SPI has signed a pact with a company formerly under the control of communist governments in Eastern Europe.
The first venture in Belgrade, Yugoslavia, boosted SPI’s revenue by $225 million in 1991, the first full year it had a controlling stake in that company.
The agreement to take over a 75% interest in Oktyabr, which is Russian for October, would mark the first privatization of a Russian drug company and the first private venture in the city, which was known as Leningrad until September, 1991.
The deal, still subject to board of directors approval and regulatory approvals in the United States, Moscow and St. Petersburg, is expected to be finalized in January, company officials said.
The announcement, meanwhile, caused a surge in the stock price of both SPI and its parent corporation, ICN Pharmaceuticals Inc.
Shares of the two corporations have been “overly depressed” in the wake of the Yugoslavia civil war, which some predicted would kill profits at Yugoslavia’s ICN Galenika, and the selection of ICN’s founder, Milan Panic, to the premiership of that Balkan federation.
Investors had become especially unnerved during June and July, when Panic traveled to the East Coast and hid from public view while he contemplated accepting the prime minster post in his homeland.
Despite Panic’s departure to Yugoslavia and the continuing war, profits from the Galenika operation have continued, said Burke Trafton of the Beverly Hills-based brokerage firm, H.J. Meyers & Co. In fact, he predicted, third-quarter earnings should be 10% higher than last year.
Investors “thought this was the end of the world for ICN,” Trafton said.
But with the announcement of a joint venture with a second Eastern European company, investors have begun changing their minds about ICN and its family of companies, Trafton said.
SPI stock, which has sunk from around $26 in June, jumped $1.75, or 10.2%, on Wednesday’s announcement to close at $18.87 a share on the American Stock Exchange.
ICN shares surged even further, up 24.6% to close at $9.50 Wednesday on the New York Stock Exchange.
SPI chief executive Adam Jerney, who was promoted to replace Panic after his July departure, said that the company is continuing with its strategy of taking advantage of privatization programs occurring in virtually every former communist country in Eastern Europe.
The company had earlier estimated that the former Soviet bloc countries account for an estimated $9-billion-a-year pharmaceutical industry. For the past two years, ICN has endeavored to tap into that market and establish a strong market share ahead of its competitors.
Jerney said that his company had identified Oktyabr for some time as a prime candidate for an acquisition. As in the ICN-Galenika deal, SPI would own 75% of the corporation, while the newly formed Oktyabr corporation would own 25%. SPI’s stake would come from the government as it seeks to divest its ownership.
But unlike the Galenika deal, the 2,100 employees of Oktyabr would not receive shares in the company. Instead, SPI officials promised to donate 2% of profits to health care charities in St. Petersburg.
In return, the city of St. Petersburg, Russia’s second largest city, would donate land to the joint venture for construction of a new facility to house the modernized company. Until the new facility is built, which company officials estimate will take 18 months, all operations will remain in the existing facility.
“The new venture is the first step toward modernization of the pharmaceutical industry of St. Petersburg,” said St. Petersburg mayor Anatoly Sobchak, in a press release issued by SPI.
Under the deal with Oktyabr, which was founded in 1714 by Czar Peter I, SPI would invest some $40 million in upgrades and would add its own product line to that of Oktyabr.
Oktyabr manufactures and markets 225 prescription and non-prescription drugs, including analgesics, vitamins, anesthetics and cardiovascular pharmaceuticals.
The $40 million would be obtained through financing with the London-based European Bank for Reconstruction and Development. The bank was formed two years ago by the Group of 7 industrial nations for investing in Eastern European privatization efforts.
SPI’s Jerney said that Oktyabr’s current general director, Leonid Seleznev, will retain his post, as will other top managers of the company. An as-yet-unselected team of SPI managers, however, will move to St. Petersburg to aid in the transformation of the company to free market manufacturing and distribution.
