EXPATRIATE'S GUIDE TO RUSSIAN INVESTMENT

Four years ago, when Vladimir Shipkov came to head the AIPM, the former Minister of Health of the Russian Federation asked him, 'Why are your member companies not building manufacturing facilities in Russia?' Shipkov recalls: "My answer was that such a question should not be addressed to the industry—it should be addressed to the government. The Minister and his superiors should themselves address the question."

In Pharma 2020, their answer is categorical. With the strategy, authorities are developing a system of preferences, aid projects, investment arms, and importation barriers. Intentions are unambiguous. The initiative falls under the Ministry of Industry and Trade, and Viktor Khristenko, minister, said the following in a speech at the ChemRar Innovation Center in Moscow: "The challenge for the federal program is the transition of the Russian pharmaceutical and medical industry to an innovative development model. In other words, we are talking about going from screwdriver assembly to a full-cycle industry that spans from development to production and meets compulsory integration into the global markets."

STEP 1: MANUFACTURING

Admitedly, the Pharma 2020 strategy is just that—a strategy. Many of the details have not yet come to power—or to the foreground. The meaning of 'local producer status,' for example, is a bit of a melancholic lark among the industry. Veldanova explains, "There is no official explanation of what 'local status' will legally imply. Does it mean just packaging? Or formulations? Which stage of production must be completed in Russia so that a product may be called 'locally produced'?"

Jérôme Gavet, Servier Head of the Representative Office

No one yet knows what is to come, and whether late-stage production will be enough to garner state-endorsed local status is to be seen. With elections coming up, the situation is delicate—as everything else—and may fall to either side. Yet, Dejan Jovanovic, general manager of Astellas in Russia, is perhaps quite right: "With a market that could likely become one of the top 10 in the world, take it or leave it. If you do not want to participate in the race, you participate somewhere else."

Moreover, as CMS' Akimtseva described, the broader trends are unmistakable—none seem to doubt the authorities' sincerity when they say they aim to saturate at least 50% of the market with locally manufactured drugs. An ambitious multinational operating in Russia perhaps must, sooner or later, think of local production, whether alone or by contract. In response, several companies have taken the greenfield leap, and are preparing the ground to bring manufacturing here in stages. AIPM member organizations have pledged in excess of $1 billion to plant construction.

However, Jérôme Gavet, general director of Servier Russia—a company that has had a plant in the country since 2007, before the announcement of state strategy—is forceful: Unless you are sure of your market, do not invest. "It is true that the position of the authorities is to encourage investment without providing transparent legislation on the definition of local producers—but for now, the barriers to importation are still acceptable for those who wish to keep production abroad," he says. "The decision must be a business-driven decision. If you have demand that warrants a large volume of production and your aim is to produce for a significant segment of the population, your investment is well founded. To expect fiscal exemption and inclusion in reimbursement lists must not be the reason to invest in local manufacturing. This must be considered as an additional benefit but must not drive the investment."

Gavet's final remark is ominous: "You can expect only one thing with certainty—barriers to importation will increase with time."

Some are yet taking a 'wait and see' approach. Others are partnering locally instead of investing in a manufacturing site—and transferring production technology and expertise. For instance, both Janssen and Roche have established such a partnership with domestic generics giant Pharmstandard. Where needed, this kind of transfer addresses the capabilities of the local industry: national standards by no measure equal international standards.

Gennady Shirshov of the SPFO, representing 36 of the largest companies on the market, is brutally honest: "Let me give you two figures that are self-explanatory. Everyone, including government officials, keeps on stating that about 75% of the market share is dominated by foreign manufacturers. That is true—but these are in monetary terms. In unit terms, it is the domestic companies that dominate the marketplace—they account for about 60% of the market share. But when you analyze what they sell, the picture is totally different. In quite a lot of cases it is not a medicine in the modern sense of this word. So the challenge is to turn the local industry into a quality- and value-based industry."

There are exceptions: local innovators like Materia Medica and Petrovax are up to snuff. Pharmstandard has modernized, line by line. However, within three years, they must be the rule rather than the exception; according to the Law on Circulation of Medicines, Russian producers have until 2014 to harmonize manufacturing standards with European GMP, or risk losing their production licenses—after all, the authorities mean to make the local industry export-ready. Some will not survive the transition. The clock is ticking.

STEP 2: RESEARCH AND INNOVATION

Milos Petrovic, Roche General Manager

Companies such as AstraZeneca and Nycomed have formally factored R&D into their plans, in addition to localizing production. As Davidsen emphasizes, "It is not enough to simply set up a production facility, plant your flag, and do sales and marketing."

Perhaps especially for those whom building a manufacturing site, is simply, not pragmatic, R&D is the focal route to well position themselves amongst their peers as Pharma 2020 unfurls. Roche, for example, is not in the business of high volumes, and utilizes just a few global production facilities to supply their operations worldwide. Russia does not warrant the critical mass for another—here, Roche products lead the high-cost reimbursement sector, and their portfolio is geared toward a small and gravely ill portion of the population. "Besides," Milos Petrovic, Russia head, says, "while I think manufacturing is quite important for building a viable, thriving pharmaceutical industry, for an innovative company establishing research capability should be the top priority." Petrovic stresses, "For me, research is the key to progress!"

Naira Adamian, Janssen Managing Director