Russia aims to double-down on growth in its pharmaceutical manufacturing sector and tempt multi-national firms to move production to the country by increasing the amount of locally-sourced drugs purchased by the state through social welfare programs.
Officials may find a receptive audience in big pharma: In the context of a punishing recession and falling national energy export revenues, a recent study by British consutancy Global Counsel concluded that firms operating in Russia’s healthcare sector are the “most optimistic” among multinationals present in the country, in contrast to the pessimism in the energy and finance sectors.
“Healthcare stands out as the sector that is the most optimistic and where many firms remain strongly committed to the Russian market,” the report, released in October, said.
Russia’s pharmaceutical industry has not faced sanctions from the U.S. or Europe, and sales have continued to grow in spite of the recession. That has led policymakers to focus in on pursuing growth in the industry.
A government plan announced in the spring by Prime Minister Dmitry Medvedev calls for increasing the share of domestically-produced drugs purchased by the state for its hospitals and pharmacies to 90% by 2018, up from the current level of 65%.
There is potential for both drug companies already working in Russia as well as those exploring the market in the government’s import substitution drive, according to Viktor Dmitriyev, general director of the Association of Russian Pharmaceutical Manufacturers.
“For localized foreign companies, [the government plan to increase purchases of locally-sourced drugs] is an opportunity to recoup faster the investment they have made here; whereas for those who do not have plants [in Russia], it is an incentive to set up local production as soon as possible,” Dmitriyev says.
Russian officials hope the policy will be the economic equivalent of pushing on an open door.
Currently Russian-made medicines make up 55% of the product mix available on the market, and just 20% of the market value, according to the Russian State Statistics Service. Over 90% of innovative medicines consumed on the Russian pharmaceutical market are foreign.
Great expectations
To be sure, while it may provide a new direction for growth, drug production stands a dim chance of being as lucrative as Russia’s energy production, which accounts for about two-thirds of the country’s total exports.
Yet Russia remains hopeful it can replicate the success of India, which has earned billions by luring international pharma companies into its boarders and by producing vast quantities of generic drugs that are sold all over the world.
The report by Global Counsel noted that AstraZeneca, a British-Swedish pharmaceutical firm, saw revenue in Russia grow 26% in the first half of last year, and 18% over the full year.
Novartis, the Swiss multinational, saw double-digit growth in constant currency terms, although sales in Russia fell in dollar terms, the report said. Russia was the biggest driver of growth in the over-the-counter segment in common currency terms for Novartis, according to the report.
Another study of pharmaceutical firms operating in Russia carried out by London-based consultancy Ernst & Young late last year found that 70% believed that political conflict and sanctions had “no impact on their business.”
A further 13% said changes were positive and opened up new opportunities, while 17% saw new risks and plan to scale down their investment programs.
Of the firms polled, 53% said they plan to organize complete-cycle pharmaceutical manufacturing inside Russia, while 26% said they would consider buying facilities in Russia or organizing joint ventures with local firms. About three-quarters of the firms surveyed were foreign.
“Bayer is pursuing its localization strategy through selective partnerships with Russian producers being focused on full-cycle production,” says head of Bayer CIA Niels Hessman.
In 2012, Bayer entered into a partnership with the Russian manufacturer Medsintez for the production of pharmaceutical products. In 2015, the first commercial batch of anti-infective medicine Avelox was produced on the facilities of Medsintez, he added.
France’s Sanofi Pasteur also sees potential in working with Russian partners. “Under the import substitution strategy, we see additional opportunities for expanding business in Russia through cooperation with Russian companies,” says Thibault Crosnier Leconte, managing director of Sanofi Pasteur, the company’s vaccines division, in Russia.
The French company is planning to establish the production of a popular children’s vaccine at the St Petersburg plant of the Russian company NANOLEK. Sanofi Pasteur plans to start localizing its vaccine production in 2016, by transferring technology know-how and the quality control system.
The technology transfer is due to be completed by 2019, and the plant in St. Petersburg will produce up to 10 million doses a year, fully meeting the existing demand for this vaccine in Russia, Leconte says.
American company Abbott recently carried out one of the biggest deals in the history of the Russian pharmaceutical business, purchasing the country’s second biggest manufacturer of medicines, the Veropharm company, for 16.7 billion rubles ($495 million at the 2014 exchange rate).
“Right now our primary goal is to ensure a smooth transition of Veropharm into Abbott’s global organization without any disruption of the supply of products to patients and healthcare providers or to the Veropharm business in general,” says Irina Gushchina, public affairs director to Abbott Russia.
According to Gushchina, Abbott is planning to further expand Veropharm’s R&D and production capabilities in gynecology, neurology, gastroenterology, and oncology, where demand for medication is particularly high.
