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

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Russia: The Rise (and Fall) of Healthcare


Pharmaceutical Executive


"Putting More Legs under the Table"

Tryggvasson's focus is on "cardiology and central nervous system therapies while 'putting more legs under the table.' The Russian OTC market accounts for 70% of our sales and offers potential for line extensions as old, established generics are slowly leaving." The ZiO Zdorovie acquisition should add about $40 million in annual sales immediately, and while Actavis is just breaking into the top 10 in the generic market, Tryggvasson is more than hopeful. "We will be number-one one day," he contends. "The issue for us is to manage our growth, because if you try to swallow too much 'candy' you will have some digestive problems."

One might wonder how a company from the number-one country in the world in transparency, Iceland, could have such aspirations in Russia, which slipped to a ranking of 121 in the 2006 Transparency International Corruption Perceptions Index. Tryggvasson's answer is quite simple: "Russia is surely moving in the right direction. It is now becoming more predictable and easier to manage systems that are transparent in Russia."

Expecting an M&A Stampede


Dmitriy Kushaev, Managing Director and Head of Investment Banking at Troika Dialog
A few years ago it was true that taking out a bank loan was not a viable option, since banks saw pharmaceutical R&D as "speculative" and interest rates in Russia were around 25%. Alexandr Itin, general director of Otechestvennye Lekarstva, says things have now changed: "It's not hard for us to attract money from the market today, since money is quite cheap. Projects require 'long' money, not just cheap money. We have positive experience in placing bonds."

According to Dmitriy Kushaev, managing director and head of investment banking at Troika Dialog, not only is there a considerable amount of funding available, but ruble interest rates are also in line with euro bonds. At the same time, there is a clear lack of available pharmaceutical shares in the local equity market. This should not be ignored, as Moscow is poised to emerge as the number-two capital city in Europe within the next decade. Kushaev, who set a precedent by placing the first Russian pharma IPO, Pharmacy Chain 36.6 (a resounding success - the share price has increased sixfold), comments, "The market wants more and will get more, especially since the fundamentals are here."

In April 2006, privately owned Troika was engaged in the IPO of Veropharm, the first pharmaceutical producer in Russia to go public. The company's shares now trade at 13 times the 2006 actual EBITDA and 10 times the 2007 expected EBITDA - very respectable valuation metrics by any standard and a benchmark for the future. This is on par with other Eastern European producers, which are also mainly generic manufacturers.

"Even at these strong valuations, the company is still very attractive when compared to its regional peers who have already been acquisition targets for a long time now. Russia is the natural next stop for multinationals," says Kushaev.

The industry is reaching critical mass in production, retail and distribution, so a strong wave of mergers and acquisitions should hit very soon. "Companies in Russia are just trying to be ready for that. In fact, the planned Pharmstandart IPO in London and Moscow may not happen if somebody makes a good offer," Kushaev adds. "I would not be surprised if they are on the dual track - IPO or strategic sale - and the only critical factor for both is transparency of governance, finances and business model."

Kushaev believes that strategic interests will target production assets as well as specific local skills in product origination, launch and marketing. "While some of the local players have the potential to stay independent and become quite big companies due to the consolidation and general high growth of the market, the process of developing the industry will require the participation of international players. It is possible to make more money here than anywhere else in Central and Eastern Europe. Russia is very interesting as a playground for production. Unlike the resource industry, investments in the pharmaceutical industry are welcomed. The time is right for international collaboration to develop the Russian pharmaceutical industry, and Troika can navigate the process," he says.


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