9 March 2011

Local Drug Industry Gets Kremlin Injection

Local Drug Industry Gets Kremlin Injection
The domestic market is set for a new growth spurt, and foreign companies are staking claim before facing restrictions. Late last year, Prime Minister Vladimir Putin unveiled a new two-decade-long plan to modernize the country's pharmaceutical industry and to give local firms a greater presence in international markets, with $3.9 billion in government funding. Putin said he wants 90 percent of Russia's vital medicines and 50 percent of its medical equipment to be domestically produced by 2020. He is also determined to increase exports eight-fold.

Local Drug Industry Gets Kremlin Injection
By Rachel Morarjee, Business New Europe, March 4, 2011. Foreign pharmaceutical companies and medical equipment manufacturers will face new restrictions on selling their goods in Russia if they do not bring their technology and manufacturing facilities into the country, he warned. "We will have restrictions for them on our market if there are no imports of manufacturing facilities and technologies," Putin said. But he added that the trade barriers would be implemented in a gradual way.

Dmitry Genkin, CEO of Russia's Pharmasynthez, which raised $17.6 million in a November 2010 Initial Public Offering (IPO), said Russia has long struggled with the Soviet legacy of building most of the pharmaceutical industry in Eastern Europe. "It left us with a huge gap between fundamental sciences and applied science, like medicine, when the Soviet Union collapsed," he explained. Russian firms have long awaited government support, but current spending levels in Russia fall far short of the money spent to support drug research and development (R&D) in Europe, Genkin said. "The money being spent by the Russian government is still peanuts compared to R&D spending by the European Commission or the U.S. National Institutes of Health," he said.

Nevertheless, Russia's pharmaceutical market is growing twice as fast as the United States and European markets and has already become a key battleground for pharmaceutical companies whose sales have stalled in Western markets as patents expire. "The pharmaceutical market boosted by consumer and government spending is set to outperform Russian GDP, while the fragmented regional pharmacy segment offers big consolidation potential to leading chains," said a representative from Russian brokerage Uralsib. Unsurprisingly, foreign companies' initial reaction was skeptical. International pharmaceutical companies working in Russia say more dialogue with the government is necessary as the domestic market undergoes changes stemming from the recently adopted state strategy for the sector, The Moscow Times reports.

The newspaper reports that a straw poll of participants in a conference on the future of Russia's pharmaceutical industry showed that more than 80 percent of them view the latest regulatory efforts as "ill-considered and creating additional barriers." However, Western drug giants are also determined not to be trapped by import barriers and are setting up domestic manufacturing bases in Russia to cash in on the market's growth potential. Just before Christmas, Swiss giant Novartis said it would invest $500 million in Russia over five years, building a manufacturing plant in St. Petersburg to focus on local manufacturing and R&D partnerships with local companies. Switzerland's Nycomed and Denmark's Novo Nordisk have also announced plans to start producing in Russia, while Britain's GlaxoSmithKline struck a vaccine deal in November with Moscow-based Binnopharm. Already this year, French giant Sanofi-Aventis appointed a new emerging markets management team to boost their market share in Russia, which it considers one of its key markets.

Meanwhile, Russian companies are also looking at markets overseas. Pharmasynthez said it will use part of its IPO funds to purchase pharmaceutical producers in Europe, as well as in the United States and Israel. Pharmasynthez is looking for small, growing and profitable companies that own production facilities, Genkin said. With the push to promote domestic pharmaceuticals, the Kremlin has begun a new effort to diversify the Russian economy. Analysts are excited by the government's initiative, as it gives them a new sector: In the last week of January, Russian investment bank Uralsib launched a resurgence of research into the pharmaceutical sector with a report entitled "Just what the doctor ordered."

"Russian pharma producers offer an excellent domestic story and access to defensive market niches and strong cash flows. The relative low performance of Russia's pharmaceutical market by comparison to other BRIC markets is compensated for by the market leaders' higher margins and consolidation potential," Tigran Hovhannisyan, Uralsib's analyst, wrote in the report. Photo: Russia’s pharmaceutical market presents a great opportunity for investors in the near future.

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