Russia: The Rise (and Fall) of Healthcare - Pharmaceutical Executive


Russia: The Rise (and Fall) of Healthcare

Pharmaceutical Executive

Despite current excitement about who the next president will be and recent reports that the value of bribes to officials nearly matches the state's total official revenue of $250 billion, Davidsen remains optimistic. "Conservatively speaking, I see Russia as a top-five European pharmaceutical market in five years and as the biggest in Europe in 10 years' time."

"Healthcare expenditure per capita in Russia, even when including the DLO, is still only around $60 to $70, compared to levels as high as $300 in other Eastern European markets. By taking into account these extremely important figures, we can understand the enormous potential for growth," he concludes.

Given such expectations, it is no wonder that for Davidsen, "the number-one challenge today is to manage high corporate expectations of sustainable percentage growth that has been in the 50% to 100% range in the last couple of amazing years." He believes the 'easy years' of 2001 to 2004 are now gone. "We will eventually follow the Central and Eastern European path of less than 10% current growth."

Common Misconceptions

Becoming a Fixture in Multi-Center Clinical Trials
Paul Melling, founding partner of Baker & McKenzie - CIS, the first Western law firm to be registered with the Soviet authorities in 1989 and one of the largest practices in the region, advises: "There are two common misconceptions about Russia; one is that Russia is the same as everywhere else, and the other is that it is so different that none of the usual rules of prudent business practice apply. Both misconceptions will result in disappointment."

One must understand the unique features of the Russian pharmaceutical industry, says Melling. Features such as its heavy dependence on distributors: Two diversified national distributors, SIA International and Protek, control nearly 50% of the market, with turnover of well over $1 billion each. No pharmaceutical network existed in Soviet times. At the time of the financial crisis, the business was in the hands of a small number of relatively inexperienced companies that were not financially well-managed or transparent. As the Russian market started to open up, multinational pharmaceutical companies began offering longer-term credit lines to their distributors. It worked very well until the ruble crashed and only half of $350 million in outstanding balances was collected. "The pharmaceutical sector, aside from the banking sector, was the hardest hit," says Melling.

A New Interest in Russian Production

Paul Melling
Today, in light of the additional money flowing into the healthcare system, it is no surprise to see the last holdouts – like Wyeth - and the first global biotech giant, Amgen, enter the market. "Russia is now a a genuine market," says Melling. "More companies will start packing here and will eventually move into actual manufacturing. The trend will develop, and multinationals will be more 'Russian.'"

While this trend is clear, imports still account for three-quarters of the Russian market by value, and an even larger proportion of the DLO program. Due primarily to bureaucratic obstacles, concerns about intellectual property rights (such as data exclusivity), and persistent political and economic risks, few companies have a direct manufacturing presence in Russia. Regional player Gedeon Richter was first, KRKA followed in 2002, and now Servier and Egis are in the process of bringing joint local production online. Nonetheless, an AIPM and PricewaterhouseCoopers joint study in 2005 showed a clear trend toward localization: 18% of respondents were already engaged in some manufacturing activity, and 50% expressed interest in gaining some kind of production presence in Russia within five years, with a preference for full-cycle production.


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