Russia Pharmaceuticals and Healthcare Report Q3 2008

Beginning this quarter, BMI introduces a new and improved forecasting methodology. This, along strong Q108 results reported by local market research agencies, has led us to substantially upgrade our growth forecast for 2008 for the total pharmaceutical to 24% year-on-year (y-o-y). For the period 2008-2012, we forecast average annual growth of 13.8% in US dollar terms and 10.5% in local currency terms. As BMIs recently launched Burden of Disease Database underlines, Russia faces a greater disease burden than any other European country. The government has a major opportunity to address this crisis under ambitious plans to expand medicines provision and revive the pharmaceutical industry. Implementation, however, will remain the biggest challenge.

In June, Prime Minister Vladimir Putin announced plans for the launch of a mandatory medicines insurance scheme with state subsidies, to be launched in 2010. These mechanisms will in turn provide funding for a new and comprehensive medicines provision programme. Putins statements represent the most detailed public elaboration of plans that have been under discussion for several months now. The programme is due to be launched in 2010. Some 18 months is a long time in Russian politics and the real test will be to see if the government puts in place effective mechanisms to weed out graft and waste, two problems that saw the DLO supplementary medicines scheme blow up spectacularly in 2007.

The new medicines insurance scheme is also intended as a vehicle for reviving the domestic pharmaceutical industry, which now accounts for just 25% of sales in value terms. More generally, the government would like to see the State Pharmaceutical Holding, a diverse group of research institutes and generally small manufacturers, take on important substitution duties in areas such as vaccines, hormones and other segments where Russia (and the Soviet Union) was previously strong. But the much discussed blueprint for the pharmaceutical industry, outlined by Health Minister Tatiana Golikova on the same day as Putins medicines insurance initiative, remains vague about what do with Russias myriad smaller, regional producers as well as some dodgier larger makers of copy drugs.

Medicines prices is emerging as a stick with which to beat international drugmakers as well as a major headache for the government as it aims to tame inflation driven by record high food prices. The countrys Audit Chamber reported in June that baseless increases in the price of imported medicines had cost the state around RUR3bn (US$117mn) in 2006 and 2007, with 90% of state purchases going to imported medicines. The auditor criticised the lack of a single pricing regulation for state purchases.

It perhaps this level of political uncertainty and the high price of existing assets that has slowed the tide of M&A and new market entries in Russia. In one recent move, Pfizer, the number sixth player in 2007, opened its own warehouse and launched its own operating subsidiary in the country in May. But activity in the wholesale and retail market may slow as the Russian Federal Anti-Monopoly Service (FAS) probes concentration in the sector and new retail restrictions are on the table. Russia remains a difficult market, with the threat of government intervention on the horizon.