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. Last Updated: 07/27/2016

Drug Giant to Suspend Production

California-based ICN Pharmaceuticals will close all five of its Russian factories for 25 days starting Sunday, sending employees on partially paid leave.

ICN promotion director Iosif Dzialoshinsky said the company needs to suspend production for awhile to rethink relations with distributors and empty warehouses that have filled up as demand shrank after Aug. 17.

ICN, which The Wall Street Journal last year ranked first among major U.S. pharmaceutical companies in shareholder returns, relies heavily on the Russian market. In 1997, the company's sales in Russia reached $134.7 million, or 18 percent of its total sales of $752.2 million.

Last year, ICN moved its East European headquarters from Belgrade to Moscow, where it bought an 11-story building for the purpose.

The exposure has cost ICN dearly since the Russian financial crisis hit and the ruble was devalued. The company posted a net loss of $65 million in the third quarter of 1998 on revenues of $163 million. Eastern Europe accounted for a pretax loss of $75 million, half of it caused by currency exchange losses.

According to ICN's 1997 annual report, the company planned to double its 125-strong Russian sales staff in 1998. Instead, it was forced to cut its Moscow staff by 50 percent and reduce remaining employees' salaries by 40 percent.

While the cuts may have rationalized the company's Russian operations, ICN could not have done anything to prevent the $3 billion Russian pharmaceutical market from crumbling. According to Dzialoshinsky, distributors owe ICN $34 million for drugs already supplied.

"Our factories have little working capital left because of this, and that makes work very difficult," Dzialoshinsky said.

ICN has been building its own network of pharmacies across Russia to cut out the middleman, but the 40 pharmacies the company has now are not enough to sell the output of five factories ICN owns in St. Petersburg, Tomsk, Yoshkar-Ola, Kursk and Chelyabinsk.

The five factories' production volume appears to be too large for the current market anyway.

"Production will stop from Dec. 20 until Jan. 15, and we will use the time to sell out existing stocks," Dzialoshinsky said. "The market has shrunk, and we need to look around and work out new tactics."

The factories' staff, meanwhile, has been sent on forced leave, during which time they will get 70 percent of their pay.

ICN is far from the only drug company suffering from a precipitous drop in demand. All pharmaceutical producers have seen their sales in Russia drop by between 30 and 90 percent in August, September and October, said David Kennedy, executive director of the Association of International Pharmaceutical Manufacturers.

The association, which comprises over 50 foreign medicine producers represented in Russia, estimated that in November, sales started picking up, but they still stood at only 50 percent of the November 1997 level.

"Both importers and local producers now have considerably overstocked warehouses," Kennedy said.

In the long term, companies with production facilities in Russia, such as ICN, will not be hit as hard as importers because their costs are in rubles rather than in dollars.

"Imported medicines have gone up in price considerably more than locally made ones," Kennedy said.

Before the Aug. 17 ruble devaluation, imports accounted for 70 percent of Russia's pharmaceutical market.