Medicine is displayed in the drugstore window.
Photo: ITAR-TASS
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Antipoverty Pills
// Foreigners buy up Russian pharmaceutical plants
The Pharmaceutical Market
The Russian pharmaceutical industry marked the start of this year with two sales of large domestic firms to
Western players. Nizhfarm went to the German Stada concern, and Akrikhin passed to the control of the international holding Health Tech Corporation. In the opinion of most experts, the arrival of companies with foreign capital is just beginning in the industry. Russia's fast-growing pharmaceutical market will attract an increasing number of generic producers from foreign countries.
A Case of Interest
Western companies' interest in the Russian pharmaceutical industry appeared in the mid-1990s. Several foreign companies began setting up drug-packaging companies in Russia, but this could not be called a full-fledged arrival of foreigners into the industry. By the end of the last century, only two foreign companies had full-cycle plants in Russia. These were the American ICN Pharmaceuticals Inc., which managed five plants (now the Farmstandart group of plants) before leaving Russia in 2003, and the Hungarian Gedeon Richter, with one plant. In 2002, the Slovenian KRKA became the third full-cycle producer in Russia after completing construction of a plant in the Moscow suburb of Istra.
In the experts' opinion, the reason for the slow entry of Western players with their facilities onto the Russian pharmaceutical market was that, even a few years before, it had not been particularly interesting for large companies due to its insignificant volume. For example, in 2002, according to various estimates, turnover on the Russian pharmaceutical market was $2.5-4 billion per year, which was comparable to turnover on the market in Poland, where the population is one-fifth that of Russia. In addition, the fact that the state, not the market, regulated drug prices in our country frightened off Western producers. This also hampered the development of Russian pharmaceutical companies.
However, the presence of state control did not hinder the development of retail and distributor companies. As a result of the rapid growth of pharmaceutical retail, by the end of 2005, there may already be several national drugstore chains in Russia. These include 36,6, Doktor Stoletov, and O3, which was formed at the end of 2003 through the merger of the Chudo Doktor and ICN chains and a number of other companies.
The picture in the distributor service sector in Russia today is very similar to the situation in developed countries. In European countries, five to seven leading distributors control the market. In Germany, for example, large wholesalers have a 70-percent market share; in France, this figure is close to 100 percent. Five companies control the market situation in Russia. According to the data of Farmexpert Marketing Research Center, the combined share of Protek Application Center, SIA International, Schrey, ZAO ROSTA, and Apteki Holding is nearly 60 percent, with Protek and SIA accounting for nearly 40 percent in 2004.
The degree of concentration of large distributors may seem low compared to Western countries. However, you have to consider the multistage distribution system in Russia, caused by the difficulty of distributing drugs over the country's huge territory. This is why domestic distributors are forced to work with so-called second-tier distributors, i.e., local companies. It is not inconceivable that the share of large pharmaceutical distributors will increase in 2005. In the experts' opinion, the implementation of an additional drug provision program on January 1 in connection with the monetization of benefits could have a significant influence on the alignment of forces on the market
An Organized Takeover
At the end of 2003, the American company ICN left the Russian market. After investing nearly $200 million in developing its business in Russia, the company decided to sell its five plants and large drugstore chain. ICN's management considered the further development of business in Russia unpromising. This sudden withdrawal from the market should have had a negative impact on foreign companies' investments in the Russian pharmaceutical industry. However, the fears were unjustified.
As recent events in the industry have shown, even this negative experience did not result in stagnation in the drug manufacturing sector. In November 2004, the German pharmaceutical concern Stada Arznimittell AG announced the purchase of OAO Nizhfarm, Russia's fourth-largest drug manufacturer. This deal was historic in its own way, because it marked a revival of the interest of foreign business in the Russian market. The new owners paid an unprecedented €80.5 million for Nizhfarm. In the opinion of most analysts, this price greatly exceeded the actual value of the assets and highlighted the increased interest in them.
The revival of interest in the Russian market as a whole and in domestic pharmaceutical companies in particular is explained by several factors. A worldwide policy of developing generic companies – and these are the ones aiming to enter Russia – implies the presence of drug production facilities in the country where they will later be sold. And in order to achieve the greatest success on the Russian pharmaceutical market, it is not unreasonable to have local production here.
The increased activity of Western generic manufacturers is also conditioned by the fundamental changes taking place in the industry. Growth rates of drug production and sales surpass GDP growth rates by five or six times. Demand for medicines in Russia in 2004 reached $6.35 billion, and the forecast for 2005 is $7.15-8.65 billion. This factor, incidentally, was the deciding one in the sale of Akrikhin to the Cypriot company VIP Progress (Health Tech Corporation manages the asset), which previously was never directly involved in the pharmaceutical industry. After paying $40 million for the pharmaceutical plant in January of this year, the company gained an admission ticket to a fast-growing and prospective pharmaceutical market.
The experiment of buying Nizhfarm and Akrikhin will probably not be the last. In the experts' opinion, two other large pharmaceutical companies – Verofarm and Farmstandart – will be the next to change owners. According to market participants' information, a presale audit is already going on at the first company. The second company has gone through restructuring, and besides the existing plants, its structure now officially includes two more plants – Ufavita and Polifarm. Obviously, this increases Farmstandart's investment attractiveness.
To Be Continued
Experts are inclined to believe that the entry of foreign companies on the Russian market will continue in the future, although at less rapid rates. The main strategy for their appearance will be in building their own companies rather than in buying up already existing assets. “The deterioration and obsolescence of the equipment, as well as the outdated assortment of drugs produced at Russian companies, are deterrents,” says Aidar Ishmukhametov, chairman of the board of directors of the Remedium group of companies. “The situation is developing where it is more economically advisable to build new plants in most cases than to rebuild old ones.” “Today, the situation is such that production costs, wages, and other expenses are the same in Russia as on the markets of Central and Eastern Europe, or even higher,” says Aleksandr Belavich, the head of the Russian representative office of the Croatian company Yadran. “Therefore, under current conditions, it's more logical to invest in already existing facilities and to improve your own logistics.” These arguments are supported by recently published plans of the Belgian pharmaceutical company Solvav Pharma, which, together with its Russian partner, NPO Petrovaks Farm, has started construction of a plant to produce flu vaccine just outside Moscow. The Serbian companies Hemofarm and Servier are also building plants.
With the arrival of foreign manufacturers, the number of Russian companies will gradually decline, with the weaker manufacturers that will have difficulty competing with foreigners leaving the market first. In addition, experts estimate that more than two-thirds of the companies will not find the funds for GMP certification (Good Manufacturing Practice) and will also prefer to leave the market.
At the same time, it is clear that generic companies will aim for the Russian market above all. Russia has already developed as a generic country. Generic products account for 78 percent of total output. This is explained by the low cost of expanding generic production. In order to successfully expand their business, companies that develop original preparations must invest money in developing new drugs and in marketing to promote them on the market. Generic manufacturers do not have to do this.
The market's generic specialization determines the reasons why companies specializing in the development of original medicines and able to speed up the process of concentrating production on the market have been uninterested in opening or buying a facility in Russia. These companies usually arrive on the market by taking over smaller manufacturers of innovative products. But there are virtually no innovators in Russia at present, which means an absence of entry points. The only exception among manufacturers of innovative products that are large by Russian standards may be NPO Mikrogen, but it is state-owned and is not subject to privatization.
Dmitry Kriazhev
All the Article in Russian as of Mar. 23, 2005
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