Eastern European intrigue cost Valeant Pharmaceuticals International plenty in the late 1990s.
Now the Costa Mesa-based drug maker could recoup some of its losses from a plant seizure by the government of former Serbian president Slobodan Milosevic. But collection could prove difficult.
The International Court of Arbitration in France late last month ordered the Republic of Serbia and its state health fund to pay as much as $50 million to Valeant. The payment stems from a 1991 venture that Valeant,then known as ICN Pharmaceuticals,formed with what then was Yugoslavia.
Valeant contributed $50 million to the venture, called ICN Yugoslavia. The partnership was part of a bid by ICN founder and chief executive Milan Panic, a former Yugoslavian prime minister and Serbian native, to set up operations across Eastern Europe.
In 1999, Milosevic’s Serbia took control of ICN Yugoslavia in a move viewed as political retribution for Panic challenging Milosevic for Serbia’s presidency in 1992.
The seizure came at a time when ICN Yugoslavia’s Galenika drug operation was owed $175 million for drug supplies it sold to the Serbian public health system. Valeant sued the Serb and Yugoslav governments for more than $500 million in 1999.
Will Valeant collect on the court’s award?
“It is important to note that collection of the award will be subject to enforcement proceedings,” said Robert O’Leary, Valeant’s chief executive, in a statement. “But we are hopeful that the Serbian authorities will see the country’s place in the international business community is best served by respecting the decision of the (arbitrators) to which they chose to bring this case.”
Neither O’Leary nor President Timothy Tyson, who is set to replace O’Leary as chief executive on Jan. 1, was available for comment last week.
Even if Valeant is able to collect, an analyst who follows the drug maker says it’s more of a symbolic than material win for the company, which posted sales of $166 million in the third quarter.
“I would describe it as not a huge deal,” said Rich Watson, an analyst with Chicago-based investment bank William Blair & Co. “It’s more of a nuisance resolved.”
Watson called the arbitrators’ decision part of “cleaning up the mess left behind by (Panic’s) prior regime” at Valeant.
Panic stepped down two years ago after a slate of directors backed by disgruntled shareholders won a board election battle.
Valeant’s outlook, Watson said, depends more on “generating growth in their existing products, (along with) in-licensing and commercializing new products.”
Watson praised Valeant’s drug pipeline in a report after the company’s third-quarter earnings results.
“We believe Valeant’s stock could perform well during 2005 as we move closer to several key milestones in 2006,” Watson wrote.
Milestones include third-phase clinical study data for viramidine, a next-generation version of Valeant’s core ribavirin hepatitis C drug, and the advancement of remofovir, a drug that’s aimed at treating hepatitis B, into third-phase development, assuming ongoing successful second-phase clinical studies.
Ribavirin Sales Falling
That’s good news for Valeant because generic drug makers are providing major competition,and sales declines,for its Ribavirin treatment.
Another positive for Valeant, according to Watson: a bigger emphasis on North American sales.
Valeant management has boosted the drug maker’s North American sales to 24% of its third-quarter total, versus less than 20% under Panic’s team.
“Given North American drug sales account for roughly 50% of the pharmaceutical industry’s total sales, we believe increased penetration of this market represents a compelling growth opportunity for Valeant,” Watson said.
Shares of Valeant are up more than 40% to $24 from their low this year in May.
The arbitrators’ decision on ICN Yugoslavia touches on one of the last vestiges of Valeant’s past,its efforts in Eastern Europe, Panic’s home region.
O’Leary has said that Valeant was moving away from Panic’s emphasis on markets with “little growth potential, such as Central and Eastern Europe.”
The drug maker sold its troubled Russian operations to Millhouse Capital in 2003. Terms weren’t disclosed, but Vedomosti, a Russian business publication, pegged the deal at about $55 million. Valeant later sold a raw material and manufacturing operation in the Czech Republic.
ICN Yugoslavia’s Galenika plant once was a key player in the company’s Eastern European strategy. In 1997, the unit accounted for some 25% of the drug maker’s total revenue.
Galenika generated sales of more than $200 million annually for Valeant from 1995 through 1997.
Things changed in 1998, due to a financial meltdown in Russia and a growing dispute with the Milosevic-led Serbian government.
Proxy Fight
That year, what then was ICN lost $352 million and saw its stock value plummet, setting off a long-running crusade by disgruntled shareholders seeking to remove Panic from his position as chief executive.
The dissident shareholders finally got their wish in 2002, when they elected a new slate of directors that triggered Panic’s ouster from the drug maker he founded in the early 1960s with $200 in his pocket.
