Russia, an emerging economy with a 143 million, ageing population, is an attractive pharmaceutical market. Foreign technology is making inroads, both through joint ventures with the participation of international pharmaceuticals majors and through Russian producers applying foreign expertise in local production.
The Russian pharmaceutical industry is booming, despite the economic recession in the country and devaluation of national currency, caused by sanctions, according to Sergey Tsyb, Russia’s Deputy Minister of Industry and Trade.
According to Tsyb, despite the sanctions, no Russian and Western companies have abandoned their investment plans for Russia for the coming years.
The current boom is mainly due to successful implementation of the existing state strategy. “Of the development of Russian pharmaceutical industry until 2020, which resulted in the establishment of production of up to 60 per cent of drugs from the list of vital within the country.
In addition, the current boom has already become a result of new methods of state regulation in the domestic pharmaceutical market, which are used by the Russian government. Among these are the reduction of administrative barriers, the provision of financial support for investors and the provision of assistance in the rapid access of new drugs to the Russian market,
At the same time, according to Tsyb, the government is currently considering designing of a new state policy in the field of pricing in the domestic pharmaceutical market.
He has also promised investors all the needed support during the implementation of their projects and during their talks with the regional authorities.
Currently, approximately 27 per cent of pharmaceuticals in the Russian market are domestic products. By 2018, the Russian government has set a goal that 90 per cent of strategically important medicines, defined according to two lists identified by the Russian government through an Executive Order issued in May 2012, be domestic products. In 2013, domestic companies in Russia produced 65 per cent of pharmaceuticals from the lists of strategically important and the most vital medicines.
Russia’s imports of pharmaceuticals increased by 10 per cent to US$15 billion in 2013, representing the world’s sixth largest import market behind the EU (US$267 billion), the United States (US$77 billion), Switzerland (US$24 billion), Japan (US$22 billion) and China (US$16 billion).
Russia currently contributes only 0.2 per cent of the world's supply of pharmaceuticals and its domestic market is dominated by imported drugs (75 per cent). Since the Russian government aims to increase the share of local drug producers to 50 per cent by 2020, a regulatory regime that favours local manufacturers was introduced. This left foreign companies to operate within a reduced commercial segment and therefore proper marketing strategies became of a paramount importance for them.
Growth potential
As with the other BRIC (Brazil, Russia, India, and China) nations, Russian pharmaceutical market offers strong growth potential. In 2012, the market was valued at $17.1 billion and grew at a compound annual growth rate (CAGR) of 17.7 per cent between 2008 and 2012 . The market is expected to grow at a CAGR of between eight and 11 per cent for the period of 2013 to 2017 .
The Russian Government's ambitious Pharma 2020 plan, introduced in 2009, includes funding of nearly US$ 5 billion and seeks to dramatically increase domestic pharmaceutical manufacturing and R&D capabilities.
As a result of the Pharma 2020 plan the demand for international pharmaceutical ingredients and manufacturing and packaging equipment will be increasing dramatically in order to upgrade existing manufacturing sites to GMP standards.
Innovation and local production are the key features of the Russian government initiative launched in 2009 on the topic: "development of the pharmaceutical and medical industry of the Russian Federation until 2020". Its aim is to aid the transition of the pharma industry to an innovative model of development. The program assumes financing to the tune of 177.6 billion rubles ($4.8 billion). One of the primary goals of the program is to increase the local production of drugs at least 50 per cent of consumption. Currently this proportion is less than 20 per cent.
The policy document lists the major systemic problems of Russia's pharmaceutical industry. They include an imbalance of regulatory requirements facing Russian as opposed to foreign producers, the lack of economic motivation of domestic producers, and a shortage of highly qualified staff. Other problems affecting the industry are a shortage of financing for drug production, insufficient protection of intellectual property rights and the need to raise quality in line with Good Manufacturing Practices (GMP).
"Pharma-2020" will be implemented in two stages. Stage one (2011-2015) aims to overcome the scientific and technical lag of national pharmaceutical and medical industry and realising import substitution of strategically important pharmaceuticals. Stage two (2016-2020) is meant to finalize the transition of pharmaceutical and medical industry to a model of stable innovative development and the provision of the Russian market with a wide array of accessible and quality products produced locally.
The arguments in favour of localization of pharmaceuticals are numerous and closely related to the government's declared priority to assume an innovative vector of development for the pharmaceutical industry among other sectors. In other words, localization of manufacturing and technology transfer will play a critical role in Russia's effort to create an innovative pharmaceutical industry in the next decade.
Under the Pharma-2020 program, the government plans for 90 per cent of essential drugs to be produced locally by 2020. The government also seeks 60 per cent of local medicines to be innovative; pharmaceutical exports are hoped to grow eight-fold compared to 2008.
President Putin has promised almost $ four billion for this initiative, as well as policy assistance including new regulations on GMP.
The Pharma-2020 program focuses on localization of production and import substitution by aiding Russian pharmaceutical companies in development of alternatives for drugs that have so far been imported. The government hopes to diminish costs for essential drugs on the Vital Essential Drug list.
The Russian government adopted significant reforms to the country's pharmaceutical industry starting in 2008. According to a 2012 survey of the Russian pharmaceutical industry conducted by Ernst & Young, both foreign and domestic manufacturers projected significant growth in Russian pharmaceutical markets.
The Russian Ministry of Health reported that the governments expenditure on healthcare in 2011 amounted to 3.56 per cent of GDP. A new government strategy announced in 2012 aims at modernizing the healthcare industry and encourage further development by 2020.
While the Russian pharmaceutical market offers great opportunities to pharmaceutical companies, it is a very complex market. Specifically, the same Ernst & Young survey also found that 77 per cent of the foreign manufacturers saw corruption as one of their greatest challenges in Russia.
Evaluating market potential
Although Russia shares strong growth prospects with the other BRIC countries, its manufacturing base is not as developed as fellow BRIC countries, such as India and China, which have a domestic manufacturing base. In contrast, Russia is largely dependent on pharmaceutical imports.
According to Russian Prime Minister Dmitry Medvedev, developing the domestic production of medicines and medical devices is more than just an economic goal, he said. Its a social project as well. However, it should be approached as a combined project. It has to be a business and an important public undertaking.
Speaking about the government's role in supporting pharmaceutical R&D, he said one of the most important tasks is to support promising areas. The introduction of innovative approaches should rely on domestic R&D and products, he said.
Investments by pharma majors
To take advantage of the growing Russian pharmaceutical market, several pharmaceutical majors are investing in greenfield manufacturing projects in Russia. For example, in St. Petersburg, Novartis built a new solid dosage manufacturing facility with capacity of 1.5-billion units per year divided between innovative drugs and generics. It is expected that the first registration batches will be produced by the end of 2015, and commercial production will start in 2017, after the all necessary testing, including stability and registration.
The $140-million investment in the new facility is part of an overall $500-million investment into Russian healthcare infrastructure by Novartis, first announced in December 2010, which covers three core areas: local manufacturing, R&D collaborations, and public health development in Russia.
The Novartis St. Petersburg facility will be one of the largest manufacturing investment made by a pharmaceutical multinational company in Russia to date. Novartis began construction of the facility in 2012 and will complete construction and equipment installation by early 2015. The facility is in the Novoorlovskaya Special Economic Zone located to the north of the St. Petersburg city center.
AstraZeneca invested $187 million to build a new pharmaceutical manufacturing plant in the Vorsino Industrial Park in Kaluga, Russia. Over $100 million are invested in the second phase of construction, which includes construction of facilities for full-cycle production of medicines. Currently, AstraZeneca is finalizing works to complete the first phase that includes the packing facility, engineering section, and warehouse. First packs will be produced in 2015.
AstraZeneca aims to produce up to 25 million packs of medicines per year. The launch of solid dosage forms manufacturing is expected in 2016. Full-cycle productive capacity of the factory will total half a billion tablets per year. AstraZeneca will produce approximately 30 innovative medicines to treat diseases in such therapeutic areas as oncology, cardiology, metabolic and gastrointestinal diseases, and respiratory diseases. This encompasses around 80% of AstraZenecas portfolio in Russia. More than 170 employees will work at the plant and they will complete the training in accordance with international standards.