THE ULTIMATE TURNAROUND
It's hard enough to woo investors who have never heard of your company. Imagine if they've never heard of your country.
By MELANIE WARNER

(Business 2.0) – THINK YOUR JOB IS TOUGH? Imagine instead you're a CEO raising much-needed capital in the midst of a bloody civil war. The foreign investors you're pitching have never heard of your country, let alone you. If they know your corner of the world at all, it's from nightly CNN broadcasts of disturbing images--mass graves, burning buildings, tanks rolling down urban streets. Guns are perpetually trained on your factories, and missiles rain down on your city, forcing your managers to retreat to underground bunkers. And, oh yeah: You report to former Communist bureaucrats who have saddled your company with wage controls, outdated production facilities, and a name that stands for State Institute for Production of Medicines and Vaccines.

Few of us have ever had it that hard. But Zeljko Covic, the 51-year-old CEO of Croatian pharmaceutical maker Pliva, has. He turned a former Communist-run factory into the world's 12th-largest generic-drug manufacturer, with sales of more than $1 billion. He took it public, making it a competitive global player whose stock is followed by analysts at international investment banks. Other folks, having accomplished that, might rest on their laurels, content to make a decent living from generics. But Covic (pronounced Chovich) is risking it all in a head-to-head battle with Big Pharma, spending precious resources to invent new cures, license molecules, and acquire a U.S. pharmaceutical company. Thanks to those bold moves, Pliva's drug for overactive bladder syndrome has leapfrogged over one from Novartis for approval from the U.S. Food and Drug Administration, promising Pliva an estimated 15 percent of the $1.1 billion American market for bladder treatments that's currently dominated by U.S. giants Pharmacia and Johnson & Johnson.

Then again, most execs are more sensible than Covic. Save for a recent executive course, he has no formal management education, and he hadn't done business outside Central Europe before the mid-1990s. Aside from a two-year stint in the Zagreb city assembly, he's spent his entire 24-year career at Pliva, joining the company in 1980 after graduating from the University of Zagreb's School of Food and Biotechnology. Covic never learned that world-class pharmaceutical companies come from central New Jersey, not Central Europe.

LESS THAN 50 YARDS FROM PLIVA'S ultramodern 82,000-square-foot research and development center in Zagreb sit the drab concrete office buildings and grimy factories that were Pliva's headquarters until the early 1990s. A weathered sign for a fruit drink that Pliva no longer sells covers the side of one building, a reminder of the company's state-controlled past. Zeljko Brebric, deputy director of global product supply and one of the few remaining old-timers, remembers when Pliva would hire two people for the same task to meet Yugoslav job quotas.

Yet even in the days when Pliva was a capitalist's worst nightmare, it had two things going for it. One was a long history of selling generic drugs in Central and Eastern Europe. The other was azithromycin, a blockbuster antibiotic Pliva spent 20 years developing and patented in 1981. Pliva licensed the drug to Pfizer, which has made $6.7 billion selling it as Zithromax in the last five years alone, according to leading industry research firm IMS Health. (Pliva makes azithromycin for Pfizer and also sells it in Eastern Europe as Sumamed.) By 1991, Pliva was doing more than $300 million in sales.

That same year, however, Pliva's world collapsed as Croatia broke away from Yugoslavia and fighting erupted between Serbs and Croats. Before the secession, Pliva's business was scattered throughout a nation of 22 million people. Confined to Croatia--population 4.8 million--it saw domestic revenue fall roughly 40 percent in two years. Covic was Pliva's head of sales and marketing before the conflict and wanted to expand internationally to tap Europe's growing demand for generics. But Pliva's CEO at the time maintained cozy ties with Croatia's government, which would never inject enough money to make Pliva globally competitive. Anticipating more nonsensical business moves--like when Pliva built chewing gum factories on Yugoslavia's Adriatic islands to lower unemployment--Covic quit in frustration and took the job with the city. But in 1993, after Pliva continued losing sales, board members brought back the brash, outspoken assemblyman as its CEO.

Knowing that Pliva needed big-time capital to survive, Covic immediately proposed a move that to his state shareholders was unthinkable: an initial public offering. Fiercely nationalistic Franjo Tudjman, the new nation's first president, was against the idea, insisting that Croatian assets remain in the hands of Croats. "Politicians were scared the company would be owned by foreigners--Ukrainians or even Canadians," Covic says. So he embarked on a two-year persuasion campaign, pestering Tudjman and other officials daily. To make his case, he pointed to Nokia, whose Finnish identity is hardly diminished by its foreign shareholder majority.

Covic also began inviting foreign investors to visit Pliva, which was still housed in the old buildings. "It was emitting some smells," recalls Lindsay Forbes, director of equity transactions at the London-based European Bank for Reconstruction and Development (EBRD), who made the trip in late 1994. Covic was seeking a loan that would convert to stock after an IPO, which would help Pliva in two ways: It would let the company boost production of azithromycin while convincing Tudjman that foreign investment wasn't all bad. With zero experience raising money, Covic did what any upstanding American executive would do. He hired consultants.

A team from Coopers & Lybrand (now PricewaterhouseCoopers) helped him assemble a glossy brochure, an official-looking business plan, and, of course, a PowerPoint presentation. Still, when Covic traveled to the United States to pitch investors, his most valuable prop turned out to be a map. "People said, 'Where is Croatia?'" he recalls. "A woman from Boston thought we were in Czechoslovakia." Those familiar with the region associated Croatia with ethnic cleansing. Says Covic: "A lot of people were very nice and offered me coffee, but they all eventually said, 'Well, this is interesting--let's talk after the war.'"

In fact, the potential disruption to Pliva's operations from the Balkan conflict loomed large. A Pliva food factory briefly fell under Serb control, and three barracks of the Serb-dominated Yugoslav army were camped across the street from Pliva's manufacturing complex with tank guns perpetually pointed in its direction. One sunny morning in May 1995, Covic was in his office when he heard a loud explosion, followed quickly by another: Serb missiles had slammed into six targets throughout Zagreb. Covic and other executives retreated to a nearby underground bomb shelter, where they used emergency phones to call nervous Pfizer managers who were considering switching to a backup facility in Ireland to make Zithromax. Covic assured them that production would continue. "Later, Pfizer's CEO told us that throughout the whole war we were never late with even one shipment," Covic says proudly.

Shortly before the bombs fell, Covic's dream came true. In typically bureaucratic fashion, a letter from the prime minister's office arrived, granting approval for an IPO. Covic was ecstatic. It was also welcome news for the EBRD, which had committed to a $43 million convertible loan. Still, registering for an IPO meant more transparency than even Covic had expected. Zeljko Kardum, head of public relations for the then-nascent Zagreb Stock Exchange, recalls Covic's initial hesitancy over disclosure requirements. "He said it was like being forced to reveal company secrets--Zithromax's royalty percentages, gross profits on certain products, management salaries," Kardum says. A few days after learning of the requirements, however, Covic said, "OK, we'll publish this stuff."

For their road show, Covic and Swiss bankers from UBS visited 20 cities in three months, including Milan, Munich, Stockholm, Vienna, Fort Lauderdale, New York, and San Diego. When the IPO happened in April 1996, it was 20 times oversubscribed and one of the London Stock Exchange's most successful deals of the year in terms of initial demand. "To pull this off was incredible," says Michael Unsworth, a retired British stockbroker who recently joined Pliva's board. "Covic has always been a forward-thinking manager, but his determination made it happen."

Unshackled from state ownership (the Croatian government's stake in Pliva is now 0.5 percent), Covic's capitalist instincts are running wild. He has closed old factories, acquired foreign companies, and hired cream-of-the-crop foreign executives. He even fired employees who had worked for decades at Pliva. "We had way too many people," Covic says. Between 2000 and 2003, he shed half of the company's pre-IPO staff through layoffs and the sale of noncore food and beverage divisions. In 1994, Pliva's revenue per employee was $55,000; today it's $157,000.

Covic has transformed nearly everything about how Pliva does business. A new plant outside Zagreb, which began churning out azithromycin in 1998, now hums with just nine line workers per shift, half of what it took to operate the old facility. Most company documents are in English, and nearly half of Pliva's executives are non-Croatian--including 18 percent of those in Zagreb. "If we remained state-owned with government-regulated salaries," Covic says, "we wouldn't have been able to attract great people." Last year Paul Cottone, a native of Brooklyn, N.Y., became the first non-Croat appointed to Pliva's management board. "Pliva executives are entrepreneurial," Cottone asserts, "though they don't yet have BlackBerrys and do e-mail at 11 p.m."

Even that may change, as Pliva prepares for its assault on the largest drug market in the world. Two years ago the company acquired Odyssey Pharmaceuticals, a drug marketer in East Hanover, N.J., where Cottone is now president. Pliva chief scientific officer Radan Spaventi wearily reports that he's made 70 trips to New Jersey since then to ensure that Sanctura--the bladder drug that won FDA approval in May--will be the first in a long line of Pliva-branded drugs marketed in the United States through Odyssey. "Pliva has a huge pipeline," says Michael Smedley, money manager at Morgan Meighen & Associates, a Canadian--yes, Canadian--company whose global fund holds Pliva stock.

That pipeline includes both generics and new molecules, which is unusual. With few exceptions, drug companies specialize in either pricey patented drugs or generic knockoffs. Spaventi believes Pliva's parallel strategy works in an age when patents are so complex that legally copying drugs requires almost as much technological sophistication as inventing them. "We've been doing original research for years, so we're ready," he says.

Of course, Pliva's jump to the international stage has been accompanied by a corresponding leap in scrutiny, and many analysts criticize Covic's dual-market approach. In late 2005, Zithromax, Pliva's cash cow for the last 13 years, goes off patent, which the company projects will result in a $128 million sales loss, only some of which will be made up by Sanctura in the near term. Meanwhile, although Pliva's top line has grown by an average of 14 percent annually since 1996, profits fell 9 percent last year, and Pliva's stock price has been more or less stagnant for the past 24 months. "Pliva is small by international standards and no expert in developing original drugs," says Guenter Faschang, manager of the Vontobel Eastern European Equity Fund in Vienna. "It should focus on generics, since that's where it can make future profits."

Covic, needless to say, remains undaunted. "It's never a sure thing when you're dealing with science," he says. "It's easier to give up, but we will continue pursuing our strategy." After flouting common sense this long, Covic knows that when it comes to doing business on the front lines, it's not always wise to pay much attention to critics like Vontobel's Faschang. They, after all, are paid to be sensible. *

Melanie Warner is a freelance writer based in New York.