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1 <b><font FACE="Arial"><a name="Good Medicine: Croatian Drug Maker Pliva - Already A Giant - Aims to Grow Even More">Good
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3 Medicine: Croatian Drug Maker PLIVA - Already A Giant - Aims to Grow Even More </a></font></b><font size="2"><p><font FACE="Arial">Wall Street Journal, by MATTHEW KAMINSKI</font></p>
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5 <p><font FACE="Arial">Zeljko Covic is a pragmatic man. He served two years on the Zagreb
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7 city council in the early 1990s, but now jokes that the experience wasn't a happy one.
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9 &quot;It didn't suit me,&quot; he says. &quot;In politics, everything is possible; in
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11 business, you have to be realistic.&quot;</font></p>
12
13 <p><font FACE="Arial">Now into his fifth year at the helm of PLIVA, the Croatian
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15 pharmaceuticals giant, Mr. Covic has a chance to show how realistic he can be. The
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17 conflict in Yugoslavia, which ended two years ago, broke his 77-year-old company's secure
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19 home market of 22 million people into pieces. And while war was raging, Hungary's Richter
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21 Gedeon Rt. and ICN Pharmaceuticals Inc. of the U.S. were moving aggressively to establish
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23 strong regional presences in Central Europe and the former Soviet Union.</font></p>
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25 <p><font FACE="Arial">Since then, Mr. Covic has embarked on a campaign to make
26 PLIVA,
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28 which is still the largest pharmaceuticals group in the region in terms of sales, into the
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30 area's unquestioned leader. Armed with a pile of cash amassed through sales of the firm's
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32 popular antibiotic azithromycin, he has begun moving into promising markets, such as
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34 Poland and Russia. Analysts say his ambitious forays may yet allow Mr. Covic to achieve
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36 his goal of turning the firm into Central Europe's first home-grown multinational.</font></p>
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38 <p><font FACE="Arial">Such visions wouldn't be possible were it not for the company's top
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40 product, azithromycin. The drug, which was discovered in a PLIVA lab in 1981, is the most
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42 widely prescribed antibiotic in the U.S. Last year, global sales for it surpassed $1
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44 billion. But the valuable patent on the drug expires in the next decade, hence the urgency
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46 behind Mr. Covic's expansion plans. &quot;PLIVA has a chance to become a
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48 multinational,&quot; says Helmut Deffner, managing director in Zagreb for Merck Sharp
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50 &amp; Dohme, the British arm of U.S. drugs group Merck &amp; Co. &quot;The opportunity is
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52 there.&quot; </font></p>
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54 <p><font FACE="Arial">Central Europe's Top Drug Companies</font></p>
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56 <p><font FACE="Arial">Company 1997 Sales*</font></p>
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58 <p><font face="Arial">PLIVA (Croatia) $445<br>
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60 ICN (U.S.) $443<br>
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62 Krka (Slovenia) $281<br>
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64 Richter Gedeon (Hungary) $279<br>
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66 Lek (Slovenia) $252<br>
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68 Egis (Hungary) $150</font></p>
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70 <p><font FACE="Arial">* In millions</font></p>
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72 <p><font FACE="Arial">Source: Daiwa Europe Ltd.</font></p>
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74 <p><font FACE="Arial">Indeed, the company keeps posting strong results. Last year,
75 PLIVA saw net profits rise 32% to 604 million kuna ($92.9 million), from 456 million kuna, on
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77 sales of 2.84 billion kuna. But strong profit figures aren't enough to keep
78 PLIVA competitive in the long term. Instead, it must now use its cash flow to strengthen its
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80 position throughout the region.</font></p>
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82 <p><font FACE="Arial">And that's just what Mr. Covic is doing. Last year,
83 PLIVA spent $138
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85 million to buy an 81% stake in Polfa Krakow, the third-largest Polish manufacturer. The
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87 purchase was part of a 1.1-billion-kuna investment drive. The campaign includes hiring
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89 additional salespeople in the former Soviet Union, and the effort is already yielding
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91 results. Last year, sales in this key area grew 40%. &quot;PLIVA is now unquestionably the
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93 leading player in the region,&quot; says Nigel Keegan, a pharmaceuticals industry analyst
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95 at Daiwa Europe Ltd. in London, in a report.</font></p>
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97 <p><font FACE="Arial">Along with the acquisitions, PLIVA is hoping its research department
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99 – which already came up with one star product --can duplicate its success by discovering
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101 another breakthrough. To be sure, the company needs to spruce up its line, especially if
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103 it is to claim a presence in the relatively more mature markets of Poland and Hungary. In
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105 this quest, the acquisition of Polfa Krakow will help. Companies that can build a strong
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107 presence across markets often have an easier time getting the licenses from big
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109 multinationals to produce and sell local versions of popular generic drugs.</font></p>
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111 <p><font FACE="Arial">Mr. Covic, who joined PLIVA in 1980, sees no reason why the company
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113 cannot duplicate the success its scientists created when they invented azithromycin. Last
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115 year, PLIVA spent 93.6 million kuna on research and development, which amounted to 3.9% of
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117 the company's total sales figure. Next year, PLIVA's R&amp;D spending is expected to grow
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119 to 4.7% of sales, according to a report drafted by Daiwa Europe. The ratio matches that of
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121 Western drug firms, but PLIVA's R&amp;D budget still pales by comparison. Mr. Covic isn't
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123 daunted. Asked how the company can compete with the vastly more generous research budgets
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125 at Glaxo Wellcome PLC or Merck, Mr. Covic says: &quot;If you take the same logic, the
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127 Chinese should be the best at every sport.&quot;</font></p>
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129 <p><font face="Arial">PLIVA's top boss adopts a similar approach to management.
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131 Recognizing that rapid growth will make running his company more difficult, Mr. Covic has
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133 begun devolving more responsibility to mid-level managers. The company, he adds, is
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135 recruiting experienced foreign staffers to help make operations more efficient. With a
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137 stronger administrative system in place, he hopes senior managers like himself can focus
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139 better on strategic tasks. But achieving this goal will require that he relax his
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141 control-oriented style -- as well as the company's secretive corporate culture. Mr. Covic
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143 can turn brusque when pressed for details about operations, and he wouldn't allow
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145 interviews with other PLIVA executives.</font></p>
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147 <p><font FACE="Arial">Analysts say it is too early to tell if his corporate strategy is
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149 working, but they welcome the changes. The company's margins have increased in recent
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151 years; last year, profits grew 32%, while revenue rose 24%. And the firm was able to pare
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153 its staff to 5,600 from the 1990 high of 7,300. But analysts say staffing is still too
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155 high, criticizing the company for moving too slowly to contain costs. The company had
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157 become famous for awarding employees and managers large pay increases, but analysts say
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159 this practice seems to have ended last year.</font></p>
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161 <p><font FACE="Arial">Investors also like what they see. PLIVA's global depositary
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163 receipts, which are listed on the London Stock Exchange, are up 19.35% so far this year.
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165 Interest grew when the Croatian government announced it would move ahead with a follow-on
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167 share offering, which had been delayed late last year in the wake of the Asian financial
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169 crisis. The offering will put another 14% of the company on the market by the end of
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171 April.</font></p>
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173 <p><font FACE="Arial">Competition is heating up again, too. The same day
174 PLIVA closed its
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176 deal for Polfa Krakow, ICN spent $33.7 million to acquire an 80% stake in Polfa Rzeszow,
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178 another Polish drug company. In January, U.K.-based Glaxo Wellcome paid $220 million for
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180 an 80% stake in Polfa Poznan, Poland's second-largest pharmaceuticals company. Is Mr.
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182 Covic worried? &quot;The whole region is a relatively big market,&quot; he says.
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184 &quot;Three or four companies will have enough room for growth.&quot;</font></p>
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186 <p></font><font FACE="Arial" SIZE="2">And what about Mr. Covic's vision of creating a true
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188 multinational out of the only company he has ever worked for? &quot;In 1993, when we took
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190 control over the company, we realized that if we wanted to develop the company
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192 successfully, we would have to survive on the international market,&quot; he says.
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194 &quot;In terms of equity structure and where we sell our products, we could say we're a
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196 multinational company right now.&quot;<br>
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