Country Report: Ukraine
Gearing up to its co-hosting of the 2012 EUFA European Soccer Championship in June/July, the vibrancy of Ukraine's burgeoning wealth is patent throughout the streets of its capital city, Kiev. Amidst scintillating fashion house boutiques and copious black tinted luxury cars lining the main streets, it is hard to grasp that this country gained its independence from the Soviet Union a mere 21 years ago. Surely, such ostentations are a reflection of Ukraine's solid economic performance since 2000, with an average annual growth of more than 7%, up until 2008 when the global economic crisis hit the country's finances hard, demonstrated by a 15% contraction of GDP in 2009. Despite the severe blow to its economy, Ukraine has been recovering at a faster rate than its Western European counterparts with growth rates upwards of 4% in 2010 and 2011, partly boosted by the country's accession to the WTO in 2008. But what has such rapid development done for the country's healthcare? The blunt and disheartening answer is: close to nothing. This reality is even more distressing when you consider that Ukraine was once the scientific and manufacturing nucleus for all of the Soviet Union's pharmaceutical needs. Yet, the situation has perhaps become so dire that a wave of change seems to be in motion and promise of a new healthcare ecosystem could soon become a reality. Welcome to the fallow pharmaceutical nation.
HEALTH AT YOUR OWN RISK
When compared to the rest of the world's life expectancy statistics, Ukraine ranks 116th, akin to some of the poorest African countries, with a dismal average life expectancy of 62 for men and 74 for women. This is exactly 100 positions lower than the country's ranking in 1960 when, under the Soviet Union, healthcare in Ukraine was universal and annual medical check-ups were mandatory for the entire population. Today, "Ukraine's public healthcare is very limited and only supports five programs for major diseases, such as oncology, HIV, tuberculosis, diabetes, transplantology, and rare children's diseases. Treatment of any other health condition must be paid entirely by the patient and this is something that they have gotten used to already," explains Irina Gorlova, CEO of Support in Market Development (SMD), one of Ukraine's leading data research providers. In light of this, the government has been mulling over the idea of introducing a reimbursement system for more than 15 years.
Ironically, the reason behind such poor health indicators lies in Ukraine's pharmaceutical expertise and manufacturing prowess during Soviet times. Oleksiy Solovyov, head of the State Administration of Ukraine for Medicinal Products (SAUMP), the country's regulatory authority, recounts that "in the Soviet times many sectors of the economy, particularly the pharmaceutical industry, were concentrated in Ukraine. Most academic institutions, which developed drugs, as well as manufacturing facilities, were located in Kiev and Kharkov. In that time the main purpose was to provide a wide range of products for the treatment of all major diseases, and increase the number of units produced. The objective of the USSR's healthcare system was to provide a certain level of health." Indeed, it was that legacy that led to the powerful group of private Ukrainian pharmaceutical producers that today account for almost 70% of all the units sold in the market, however in terms of value, the generic medicines manufactured by these companies only add up to 30%. Nevertheless, Ukraine's top 10 pharmaceutical companies in terms of value still counts four national producers, including Farmak at the No. 1 spot with a total market share of 3.8%. Farmak's market share is also illustrative of the sector's high fragmentation with more than 100 companies marketing their products in Ukraine.
Vladimir Ignatov, executive director of the Association of International Pharmaceutical Manufacturers (AIPM), explains that "the national healthcare system has not changed much since the days of the Soviet Union, under which the state was expected to pay for all national healthcare expenses. However, the reality of the situation is that today patients are paying for the vast majority of their treatment out of pocket (85-90%) because the government has ignored their role in regulating and streamlining the system, assuming that the private interests of the pharmaceutical industry would automatically do that. What has happened is that a large gap has been created between the performance of the pharmaceutical industry and the healthcare system, and this has caused some tensions between the two." Essentially, this has led to the stunting of the pharmaceutical sector in Ukraine, which today is valued at US $3 billion (SMD estimates) for a population of nearly 46 million, bringing the average annual per capita expenditure on medicines to a meager US $65 million. Under such conditions, Ukraine has amongst the lowest average prices for medicines in all of Europe, driven mostly by a robust local generic industry that only began conforming to international standards of production about seven years ago.
Viktor Poushkarev, head of the CIS Region for Finnish Orion Pharma, elaborates that "Ukraine holds the status of a branded generics market. An important difference between the Western European and Ukrainian branded generics market is the level of production control. We have very specific generic competition, in which products containing the same API can come from production facilities with very different levels. This can influence the finished product severely, with a tablet from one company containing 40mg, a tablet from another producer containing 30mg, and the tablet of a third will contain nothing. Control on production facilities is still weak, even though Ukraine recently joined PIC/S in January 2011." Orion has a clear understanding of the evolution of Ukraine's pharmaceutical market due to Finland's historical trade agreement with the Soviet Union, which allowed the company to be one of the first entrants into the market back in 1993. Poushkarev further explains that "healthcare expenditures from the state budget increase by 10-20% annually. Nevertheless, the quality of the healthcare has not changed in a positive way. This means that the main problems are still part of the system, which is understandable as it is a tax-financed system."
While the government does allocate about 10% of its budget to healthcare, SMD's Gorlova explains that "public healthcare institutions in the country are antiquated and extremely inefficient, and this is represented by the fact that only 7% of the country's healthcare budget is used to pay for the treatment of patients, while the remaining 93% is related to administrative costs." Gorlova used to head the operations of IMS Health in Ukraine before the company decided to leave the market in 2003 due to a lack of access to quality data. In response to this, SMD has resourcefully struck partnerships with pharmacies that today willingly provide them with market data. "This kind of data was a necessity to develop the full potential of Ukraine's pharmaceutical sector. In particular, multinational pharmaceutical companies were demanding such data in order to make their forecasts and report back to their headquarters. Our aim was to support them in this endeavor by providing the same quality data and services that they are used to in other markets. In doing this, SMD also serves to promote Ukraine and the region as a great opportunity for investment," she concludes.
One final hurdle that companies experience in Ukraine is the prevalence of corruption stemming from the fact that the pharmaceutical industry is a highly regulated sector with countless layers of bureaucracy. Furthermore, state employee wages are unbearably low and therefore the temptation for them to make extra money through covert means is rather high. In fact, the circumstances were so blatant that the regulatory authority today contains an anti-corruption branch that employs former secret service investigators to weed out tainted officials.
RECURRENT REACTIVITY REQUIRED
Undeniably, most foreign pharmaceutical companies have had a rough time succeeding in Ukraine, firstly because of the cut-throat competition that local players present, but more importantly because the country's regulatory and legal environment can be as unpredictable as a night at the bingo. Yuriy Savko, executive director of the Association of Pharmaceutical Research and Development (APRaD), explains that his association was created "to ensure that there was a transparent and trustworthy regulatory policy of the pharmaceutical sector. In Ukraine, regulations change constantly and at a very fast pace, which is why we need to be certain that all of these processes are transparent and involve all relevant stakeholders."
It is true that over the last couple of years the pharmaceutical sector has seen more changes to its regulation than in the previous decade, including for manufacturing standards, price registration, customs clearance, and advertising restrictions. Some perceive this as Ukraine's attempt to protect its national industry, similar to what Russia has done for itself. TEVA Ukraine's general manager, Alexandra Sologub, claims that "the government tends to protect the interests of national pharmaceutical producers. Of course it's a normal practice in any country, but by doing so, the policies that are the most beneficial for patients should be developed, not simply obstructing the activities of foreign companies. In addition to this, there are constant changes of staff at the Ministry of Health, including the ministers themselves. Under such conditions there can be no continuity for the country's healthcare and pharmaceutical sectors, and this is one of the reasons why we see such low health indicators in Ukraine. Sure, there have been some steps forward, but they only represent pockets of development scattered throughout the system. In an ideal world we are all hoping that reforms take place, but realistically, I believe it will still take a few years before the authorities realize what they need to do and make it a priority on their agenda."
However, others interpret the volatility in regulation as a positive sign that the sector has now become a priority for the government and that finally healthcare will be attended to by raising standards to Westerns European levels. Eugene Zaika, Nycomed Ukraine's general manager, contends that Ukraine's "regulatory environment is very much aligned with the European one. For many years we have had no severe problems related to regulatory approval and we are always in line with the nine-month registration term. As a matter of fact, the Ukrainian registration process is double the speed of that in Russia, where it takes close to two years and local clinical studies are needed for approval." With a focus on cardiology and neurology, Nycomed has achieved stunning growth in Ukraine and only expects greater results now that it is preparing to introduce Takeda's complementary portfolio over the coming years and is considering localizing production of some products.
Russian-born Marina Simashova, general director of US-based Unipharm, believes that "although the challenges are similar to the ones Russia coped with, Ukraine has its own approach to seeking solutions. The regulatory mechanisms that the Ukrainian government is working on are not mere copy-paste activities—Ukraine has its own way of doing business." With the best-selling multivitamin product in Ukraine and Russia, it is clear that Unipharm has learned to weather the adverse conditions of the Ukrainian market since it began its operations in 2001, even through the financial crisis of 2008, when a handful of pharmaceutical companies went bankrupt. "In these markets, challenges arise suddenly and frequently, and working in the pharmaceutical industry is like simultaneous chess: it requires managers to think about many possible challenges in advance," adds Simashova. Furthermore, "Unipharm tries to contribute to Ukrainian healthcare reform through its experience in working in the American pharmaceutical industry. It is not possible to avoid all mistakes, and making mistakes is even important in the learning process, but we can certainly caution authorities about specific mistakes and offer an overview through our experience."
Roche Ukraine's general manager, Ala Ciobanu, furthers this notion by stating that "we cannot implement the standard marketing models that are used in other countries, because the regulatory and legal environment in Ukraine is rather specific and is constantly evolving. So we have to undertake special efforts to adapt to these conditions on a routine basis." Over the last two years, Roche has restructured its local portfolio to focus on innovative products and diagnostics in anticipation that, as average income rises, Ukrainians will increasingly demand the most modern and effective treatments over standard generic alternatives. "It was obvious that a copy-paste strategy borrowed from Western markets wouldn't have worked in Ukraine so we have been developing our own methods in driving business here to ensure that our products are favored by the market. Because our products establish high medical standards of treatment, they are difficult to introduce to the market, especially because all targeted drugs require profound diagnostics undertaken beforehand to ensure that the product would work. The efficient use of our innovative products also requires the high level of education from the side of doctors who prescribe the medicine," explains Ciobanu.
Even though Roche undertook a renewal of its portfolio for strategic reasons, other companies have had to take more drastic measures to simply survive the ups and downs of the market. General manager of UK-based Mili Healthcare, Marina Sapozhnikova, tells of her company's struggle to overcome the crisis of 2008. "Due to the crisis we were forced to adjust the objectives laid out in our 5-year plan because many of the distributors in the country had serious difficulties throughout the crisis, which created a very unstable environment for us. Out of five major distributors two of them went bankrupt, and overall distributors were not able to make purchases of great volumes because of the uncertain financial environment. This also forced us to lower our costs and limit our spending, including by decreasing the number of staff. Starting in 2010, Mili Healthcare began to reshape its portfolio by adding new products and restructuring the company's operations according to new business units. Due to these drastic changes we are set to grow considerably for the coming years because we believe that the company is now prepared for such an expansion. In 2012 we will be looking to develop our financial performance and increase our market share with our revamped portfolio." Even further, Sapozhnikova expects to place her company within the top 20 in three years' time and would also like to replicate her strategies in Ukraine in other CIS markets, including Russia. "I understand that these are very ambitious targets, but we have already been successful in the past with our strategies and expertise of the market, and therefore we are sure that we can perform above the average market growth," she concludes.
The downside to adapting and testing new strategies is the risk that a new approach to business will fail. Surprisingly, this was the experience that Janssen lived in Ukraine when the company diverged from its global practices to implement a unique local strategy a few years back. Charged with jumpstarting the company's local operations, Vyacheslav Derbizh, Janssen's recently appointed general manager in Ukraine speaks of the need to revert back to a strategy closer to the company's global approach. "Over the past two years, Janssen had unfortunately been losing market positioning in Ukraine. As a matter of fact, Janssen almost shut down its business here. This is unacceptable, considering Janssen is a part of the No. 1 healthcare company in the world (Johnson&Johnson). Therefore, since I took the job we have only set one aim, which is to be No. 1 in Ukraine! In order to do so, we have short-, middle-, and long-term goals. Concerning our short-term goals, we are focused on building an organization and building a strong business. The middle-term aim is to become No. 1, and long-term is also to be No. 1 by building long-term relationships with the government, key stakeholders, and doctor associations. When looking at the market as a whole, one of the most important aims for the top international pharmaceutical companies is to establish a transparent and compliant environment and this is one of Janssen's goals as well." Indeed it has been up to the pharmaceutical companies to drive this sort of change in Ukraine, and overall the sentiment is that the whole sector is cleaning up and raising standards to provide better results, not only in business, but for Ukrainian patients as well.
GROOMING A NEW LANDSCAPE
Ukraine's sheer size and low health indicators are testimony to a vast untapped potential that must be capitalized upon in the near future. As general manager of Sanofi Ukraine, the leading foreign pharmaceutical company in the country, Jean-Paul Scheuer goes as far as claiming that "Ukraine is more European than we think, and I do not think there is another European country with such great potential. A country like Poland, with a similar population and background, has already reached a certain level of development and a certain saturation of the market. For the next year, the Ukrainian economy is expected to grow 5%, which is considered low. France would only dream of that percentage." Nycomed's Zaika asserts that "despite the fact that we have lost 20 years due to lack of government focus on the healthcare sector, there is still hope that the next government will decide on a good direction for the country. We need drastic reforms though, and at some point in the future, Ukraine will become a real European economy. Once that happens, those companies that are established here will benefit greatly." Indeed the country's accession to PIC/S in January 2011 was a bold step forward to regularize its pharmaceutical practices with global standards. Solovyov, of the SAUMP, affirms that "this clearly demonstrates the confidence of the international community in the system of state quality control of medicinal products in our country, and the Ukrainian ability to build and maintain this system according to world standards."
Already there is a trend of foreign pharmaceutical companies deepening their presence in Ukraine beyond just commercializing their products. This is clear from the wave of representative offices being turned into limited liability companies, the handful of marketing and manufacturing collaborations that have emerged between local producers and foreign companies, as well as the interest in M&A opportunities to buy out some of the local players. Perhaps the most obvious example of such collaboration is that of Ukrainian manufacturer Farmak, the No. 1 company in the market in terms of value, with its end-stage production of Lilly's recombinant insulin product. "In 2004 we began building the modern facilities that would package this product, and the idea of the partnership was that it would deepen over time until it reached a full transfer of technology to Farmak from Lilly. This is why we invested great amounts of money into the installing the most modern and highest quality equipment under European standards," asserts Oleg Syarkevych, business development manager at Farmak.
In the words of Vladimir Sayenko, managing partner of Sayenko Kharenko, the leading Ukrainian law firm that widely advises the pharmaceutical sector: "There is definitely a trend for the local industry to 'clean up' in order to be more attractive. Moreover, we have seen the legal framework being gradually improved to attract foreign investors. Yet the major country risks remain the same: inconsistent application of the laws by various regulators, corrupt judiciary, and weak enforcement. However, these risks pay off with the much higher yields on investment than elsewhere in the developed economies."
The possibility of acquiring or partnering with a local producer is even being considered by mid-sized regional players, such as Turkish flagship Nobel Pharma. Cem Demirci, general director of Nobel Ilac Ukraine, speaks about the prospect of forging a partnership with a Ukrainian manufacturer: "We are always discussing this with our headquarters because a country with a population of 46 million inhabitants definitely has great opportunities. Of course the government will always favor local production which is why it is essential for us to consider such partnerships for the future, when Ukraine will have a stable political and economic system." Nobel already has vast experience in the CIS region, having established the first GMP-certified plant in Kazakhstan and another manufacturing site in Uzbekistan. "I think that Ukraine is the market with the most perspectives within the CIS region. Indeed, there are a lot of marketing restrictions in markets such as Russia, Belarus, and Kazakhstan, whereas Ukraine is very liberal on this. But I still believe that Ukraine needs some time," concludes Demirci.
The call for reforms almost unanimously involves a push for the government to implement a reimbursement system that would benefit both the pharmaceutical industry and Ukrainian patients. It has been 15 years since Ukrainian authorities have been debating the issue of reimbursement, yet nothing had been done until 2011, when finally four pilot projects were executed in different regions of the country, as part of a plan that would bring reimbursement by 2014. Granted that these projects are mostly geared towards restructuring healthcare institutions in their respective regions, they are nevertheless the initial step to gauge how efficiently reforms can be carried out and what their true benefits may be. In terms of economic growth for the pharmaceutical market, the benefits of a reimbursement scheme are more than evident with estimates that the value of the market would double after such a move. "I think that a reimbursement system will be implemented in three years, and this is of course crucial for the improvement of the lives of the patients and to create even more opportunities. Indeed, this is necessary and inevitable," argues Demirci.
Others are more skeptical about the certainty of reimbursement. Alexander Golovnya, general manager of Lundbeck Ukraine, considers that even though some steps have been taken in the direction of reimbursement, there will be no real action in the near future. "I do not expect this to happen soon. This year parliamentary elections will take place, so we do not expect that the government will make any major changes before or shortly after these elections. However, I hope that a state reimbursement system together with a private insurance system (once established) will give patients broader access to modern ways of treatment," he says. As a company that focuses entirely on CNS disorders, for which there is no state funding, Lundbeck has been paving the way to de-stigmatize neurological conditions, such as depression and bipolar disease. "Another challenge is to change doctors' mentality of prescribing cheaper products to their patients since they worry about their patients' spending power instead of thinking about drugs' safety and efficacy," says Golovnya.
Within this debate, it is the Ukrainian companies that are most optimistic about the possibility of a reimbursement system and take the government's initiatives as credible efforts to move in the right direction. Tatyana Pechaeva, general director of Lekhim, is confident in saying that "we cannot wait any longer with the introduction of these reforms, and I am confident that they will finally be passed. We will have to see in what form and quality they will come, but at least the first brick has been laid. Reimbursement and medical insurance are connected to many other questions from which they cannot be seen separately. If we look at the reimbursement system for instance, it cannot go without production; production cannot go without science; and science cannot go without education. I hope the authorities fully understand this and tailor their reforms to the complexities of the healthcare system." With two manufacturing sites and as the 11th most important Ukrainian producer, Lekhim today is focusing on growing its local operations rather than on exports to CIS markets, which had been its main driver throughout the 1990s. Ever the enthusiast and a firm believer in her home market, Pechaeva asserts that "if we follow this development path, we will be among the top five in three years!"
Overall, as local companies experience increased pressure from their foreign counterparts, they have also been driving the wave of change within their own ranks, and have been lobbying authorities to move toward international standards of regulation. Sperco is currently reconstructing its manufacturing facilities to establish full GMP compliance for all of its operations. "So far we have been able to reconstruct about one third of our facilities under GMP standards and expect to complete another 25% by the end of 2012. We expect to complete the entire project by the end of 2013 or beginning of 2014. Aside from the GMP modernization project, we also have expansion plans that involve the construction of new warehouses and office buildings and this will be carried out over the next five years," says Lyudmyla Borysova, director of Sperco. This expansion plan is also indicative of investor confidence in the potential of Ukraine's pharmaceutical market, considering the Sperco was created under Spanish capital. In light of this, Borysova is aware of the need to "convince others to invest in Ukraine and to get over their fears of the challenges that this market holds, because ultimately the opportunities are much greater than the hurdles along the way." Furthermore, Borysova is proud to point out that "our modern manufacturing facilities were the beginning of the industrialization of the Vinnytsia region, as it later attracted other industrial projects once we had proved that it was possible to find qualified professionals in the region for these kind of activities."
Some investors have already heeded to the lure of Ukraine's latent potential by acquiring or setting up manufacturing facilities. Bulgarian flagship Sopharma acquired a plant in 2008 which they are currently modernizing to meet GMP standards. "The main reason to acquire a plant in Ukraine, in addition to the Sopharma plant in Russia, was to have an additional platform within the company to provide the entire CIS region. Another rationale for Sopharma to pick Ukraine for its production facility is the importance of this market. Ukraine was very important at the time of the acquisition in 2008, and the growth potential of the Ukrainian market remains impressive," concludes Igor Gerasymchuk, head of representative office of Sopharma Ukraine. In fact, Ukraine's promising future and efforts to improve the overall business environment of its pharmaceutical sector are also beginning to sway some of the world's leading companies. Jostein Davidsen, Nycomed's head of emerging markets, justifies the company's plans to set up manufacturing in Ukraine by explaining that it will "increase the access of our products for patients and provides us with greater flexibility in terms of logistics and distribution. It would never make sense for us to establish manufacturing simply because of government policy. We have to do it because we believe in it and believe in the future of this market." For the sake of Ukrainian patients and the country's development, it is nice to think that they are not the only ones who believe so.
Interchem: Ukraine's Scientific Excellence Endures
Based in the port city of Odessa, Interchem originated as a project conceived by five post-graduate students at Ukraine's National Academy of Sciences in 1989. At that time, Ukraine possessed the most talented scientists and chemists within the entire Soviet Union, as they were the ones that drove the innovation of soviet medicines. Initially, Interchem produced chemical compounds out of makeshift facilities, where temperatures dropped to -12°C, and stumbled upon API production by chance to later formalize its manufacturing of pharmaceutical products in 2003.
"We gradually entered the pharmaceutical area, as a producer of APIs due to the fact that we were dealing with a lot of biological chemistry. APIs are still a part of our activity and this makes us quite unique from other producers in Ukraine. Due to our chemical backgrounds, we were discovering new compounds of APIs and strived to introduce new innovative products. Today, we have one of the best levels of finished medicines production in this country and have GMP certification," recounts Anatolyi Reder, CEO of Interchem.
"Initially we were producing 100 million tablets a year. We very quickly multiplied our production fourfold by 2007, working seven days a week, 24 hours a day, without any holidays. At that point we realized that we had to expand, so we halted production for five weeks for renovation, and when the workers came they were very impressed by the new facilities." Reder remains modest in saying that "we are still a small to mid-size producer with 500 employees and a turnover of US $63 million. Our growth since 2003 has never been less than 35%, and in 2011 we even experienced 42% growth. It is quite a hard task to keep the KPIs so high." In order to do so, the company is currently expanding its facilities once again, with a total investment of approximately US $40 million. "We are adding four more buildings, one of which will be eight stories high, and overall the expansion will make our power four times of its current figure. We will also have a new chemical building which will allow us to have GMP certification for APIs. All the laboratory facilities will be under one roof, which is quite a task since they are currently all situated in different parts of Odessa."
Even though the company today exports to Georgia, Azerbaijan, and Russia, they are counting on the Ukrainian market to drive the bulk of their future growth. "The only element missing which makes it more challenging is to set up the public opinion, which is formed both by the government and public associations explaining to people that our quality is equal to that of foreign companies," concludes Reder.
Darnitsa: Leading by Example
The most radical changes to Ukraine's pharmaceutical sector are witnessed within the headquarters of some of the flagship national producers. Darnitsa is not only the leading Ukrainian manufacturer in terms of units sold, but is also the company that is undergoing the greatest overhaul of its operations to professionalize itself under international standards. Having taken over from his father as CEO of Darnitsa in 2009, Glib Zagoriy explains that "we wished to restructure our business to make it as professional and competitive as possible. At some point we realized that the Ukrainian pharmaceutical companies, while very powerful in the local market, are not interesting for Big Pharma for a number of reasons." Referring to the multiple challenges of the local market, Zagoriy feels that Ukrainian companies remain bound to their soviet legacy and are therefore incapable of truly competing at a global level.
Perhaps more importantly, Zagoriy wishes to demonstrate that Ukrainian companies can be competitive while being fully transparent and ethical. "Up until 2011, Darnitsa was focused on finishing its CAPEX project that essentially transformed our plant from an old soviet factory into a modern pharmaceutical production site under GMP standards. The project was developed together with a Swiss company in 2000 and it has taken us 11 years to complete. In parallel to the CAPEX plans we have also been restructuring our finances in order to become a debt-free company, which is where we stand today. This required that we learn how to be audited by international auditing companies like PWC, and to make all of our structures and processes fully transparent," he emphasizes.
Even though this restructuring is bound to attract potential buyers, Zagoriy affirms that the family has no intention of selling the company anytime soon, given that Ukraine's pharmaceutical sector is only at its infancy and the company wishes to be a part of its full blossoming. Furthermore, he advises that for "those companies that wish to grow through acquisitions, make sure that you are present here today so that you can learn how the market functions and what you need to do in order to be successful."
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