Hard Times Taking Bite Out of ICN Yugoslavia

ICN Pharmaceuticals Inc. said Tuesday that its struggling Belgrade unit--Yugoslavia’s biggest private employer--will cut its work force by a third because currency devaluations have sapped demand in its main markets and it has stopped selling drugs to the government.

The subsidiary, which accounts for about a third of the Costa Mesa company’s overall sales, will send home 1,200 of its 3,500 workers by the end of March, a sign that ICN’s seven-year push into Eastern Europe and Russia has hit some obstacles.

Rising demand for drugs in Yugoslavia and across the former Eastern Bloc helped ICN double worldwide sales between 1994 and 1997. But this year, the devaluation of the Yugoslav dinar stalled payments inside the country while the Russian ruble’s plunge curbed demand in ICN’s main export market.

The threat of NATO military action against Yugoslavia just added to the troubles.

“It cannot get any worse,” Zoran Vasic, vice president of Eastern European finance at ICN in Belgrade, said in an interview. “We’ve had war, sanctions, blockades, devaluations.”

The Belgrade factory, which ICN bought from the Yugoslav government in 1991, has endured the collapse of the Soviet Union, the breakup of Yugoslavia and United Nations sanctions limiting the purchase of Serb goods abroad.

Parent ICN, which is headed by Yugoslav emigre Milan Panic, says it remains committed to the region. But analysts say the company is struggling with the latest strife.

Earlier this year, the Yugoslav government failed to cover $176 million in overdue payments to the company for drug supplies to state hospitals and other institutions. Since then, ICN Yugoslavia has stopped selling to the government, Vasic said.

In Yugoslavia, which consists of Serbia, Montenegro and Kosovo, ICN is one of a small number of private companies. Its main competitors are state-owned.

“They’re the only company there that has to cope and if they say they can cope, what happened to the $176 million?” said Nigel Keegan, a pharmaceuticals analyst at Daiwa Europe.

Earlier this month, ICN announced it was buying global rights to four drugs from Roche Holding AG in order to expand and offset losses in Eastern Europe.

It’s a reversal from a year ago.

ICN’s worldwide sales in 1997 totaled $752.2 million, more than double the sales in 1994, with about $200 million coming from the Yugoslav subsidiary.

In 1997, ICN was riding high, expanding throughout Russia and going head to head with drug producers that had established brand names in the region during communism, such as Gedeon Richter Rt., Hungary’s largest pharmaceuticals company. The company posted consolidated net earnings per share of $1.93, up 10.5% from 1996.

This year, however, those earnings are expected to fall by 10.4% to $1.73 per share, according to analysts’ estimates.

It’s not difficult to see why.

In April, before ICN stopped supplying the Yugoslav government, the central bank devalued the dinar 45% against the German mark. Domestic demand already was low in Serbia, where citizens consume only about $12 worth of drugs per capita a year.

Then in August, Russia gave up its defense of the ruble, causing a 60% devaluation in the currency. Demand for imported goods plunged.

Moreover, recent weeks have seen conflict brewing between Belgrade and the North Atlantic Treaty Organization over Serbia’s treatment of ethnic Albanians in Kosovo. The threat of NATO airstrikes against Yugoslavia has waned, but isn’t over.

“There’s no light at the end of the tunnel for ICN Yugoslavia until Serbia comes back into the international community,” said Keegan.

ICN shares Tuesday were off 56 cents to $17.88.