Drug Firm Is Rising From the Rubble of Berlin Wall : Industry: Privatization brings Berlin-Chemie back to life, but the economic and social costs worry some people. The company will expand its horizons.

From his office window at Berlin-Chemie AG, Peter Krauss sees a microcosm of the intense political and economic changes occurring in what was East Germany.

Scaffolding hugs the drug firm’s run-down 100-year-old buildings like denuded ivy. Many of the buildings are vacant and decrepit.

Workers scurry along the scaffolding, armed with paint cans and power tools, brightening the drab facade of the pharmaceutical company.

The scene is in stark contrast to the muddy, twisted street that leads to Berlin-Chemie, where the only active sign of commerce is a small sausage stand tucked between ramshackle houses that haven’t been touched since World War II.

“The changes (at Berlin-Chemie) are happening fast,” said Krauss, a Heidelberg native who became vice chairman of the drug firm almost a year ago. “It is phenomenal.”

A powerhouse of industry in the East Bloc four years ago, Berlin-Chemie supplied a vast array of pharmaceuticals and agricultural and industrial chemicals to its Eastern European allies, including the Soviet Union.

Then the Berlin Wall was toppled.

That act signaled the end of more than four decades of Cold War politics in Germany--and, more importantly, threatened the very existence of Berlin-Chemie as well as thousands of other firms in what was the Communist German Democratic Republic.

Life is creeping back into those firms. Berlin-Chemie’s revival was due, in part, to its sell-off last year by the Treuhandanstalt, the governmental agency that is responsible for the unprecedented job of unloading billions of dollars’ worth of state-owned concerns.

By privatizing such firms as Berlin-Chemie, the German government is hoping that free market principles will take hold in the next few years, bringing the income and lifestyle of easterners up to westerners’ standards.

That task is daunting if not impossible--at least for the foreseeable future--and may take more than a generation to complete, economists said.

Despite efforts by the Treuhandanstalt to spur industrial growth, the federal government has been saddled with heavy debts as the western part of the country continues to prop up the infant free-market economy in Germany’s six eastern states.

Industrial production in the six eastern states has plummeted 51% since 1989, according to figures provided by the German Institute for Economic Research. At the same time, unemployment has skyrocketed, from just under 5% to as much as 50% in some recession-stricken towns.

(Some economists say, however, that the lower number was artificial because workers in East Germany were not working up to their potential and the shakedown associated with privatization now shows the true nature of the work force.)

Meantime, the Treuhandanstalt is expected to eventually rack up some $275 billion in debt related to the sell-off of state-owned enterprises--in part because western investors and foreign firms are obtaining some companies for almost nothing, considering the packages of tax breaks and incentives offered by the Treuhandanstalt.

“No doubt, this is costing the west a lot of money,” said Manfred Melzer, an economist with the Berlin office of the German Institute for Economic Research.

“There’s been a lot of criticism,” he added. “But what choice did we (Germany) have? We had to act quickly.”

Joseph Thesing, head of the international institute of the Bonn-based conservative political foundation, the Konrad Adenaur Stiftung, agreed that the agency is accomplishing its goals--but at a social price.

With so many eastern Germans out of work, there is growing resentment that the promises of Chancellor Helmut Kohl will not be met, ever.

“Solving the problem of unemployment is not an economic problem,” he said. “It is a political problem.”

Berlin-Chemie’s turnaround is applauded by economists and boosters of the Treuhandanstalt.

In 1989, the firm employed about 2,700 workers, producing a large line of therapeutic drugs and other pharmaceuticals as well as herbicides, pesticides and chemicals for the textile industry. It supplied its products to hospitals, factories and farms from the Bering Strait to Leipzig.

But with the collapse of the Warsaw Pact, the supply line was all but cut off for Berlin-Chemie. In response, it was forced to drop its non-pharmaceutical line and concentrate on a core line of drugs.

The company’s shrinkage resulted in the loss of some 1,700 jobs, company officials said. It was also faced with bringing its manufacturing standards up to par with those mandated by the Brussels-based European Community and the Geneva-based International Standards Organization.

Many of those changes were being accomplished while the firm was still under the auspices of the Treuhandanstalt.

“There was a lot to be done,” Krauss said.

Then in October, Menarini Group, a privately held Italian pharmaceutical company based in Florence, purchased Berlin-Chemie from the Treuhandanstalt.

Krauss declined to say how much Menarini paid for Berlin-Chemie or how much the company is pouring into its new German subsidiary.

The investment money--if not the purchase price--must be substantial, however.

Today, the nine-story marble and glass tower soars above the dross and neglect of the neighborhood. The plant is still under reconstruction, as are abandoned buildings. Other buildings have been demolished to make way for new, technologically advanced assembly lines, Krauss said.

The result has been further losses, even from the previous year when the Treuhandanstalt retained control of the concern. For 1992, more than $5 million in write-offs relating to the revamps in the infrastructure resulted in Berlin-Chemie earning only $282,000.

Other spending needs include investments to bring the company’s waste and water treatment and data processing up to par.

But with a new sales staff--a new development for Berlin-Chemie--the company predicts it could see a 1993 profit of $150 million, according to the company’s most recent annual report.

The company’s strategy is to continue concentrating on its old clientele in Central and Eastern Europe and to expand its market only within Germany for the next few years.

Krauss, who is heading up the new sales staff, said that he hopes to cash in on the firm’s reputation among eastern German doctors, who have used its products for decades and would likely persuade their new colleagues in the western part of the country to order Berlin-Chemie products.

But the firm is also reaching out internationally in hopes of establishing at least name recognition, if not immediate sales contracts. Krauss said he is looking toward Western Europe and beyond by the end of the decade. Most recently, the company’s name and logo was emblazoned on a hot air balloon during a yearly race in Albuquerque, N.M.

“We think we can be successful on our past image,” Krauss said. “But we are evolving all the time.”