The Russian pharmaceutical market is one of the country’s more dynamic industries, having consistently outperformed national GDP growth rates. An analysis of the pharma market, however, suggests that regulatory obstacles are more likely to hamper FDI than the current economic recession.
The Russian pharmaceutical industry offers outstanding investment opportunities for foreign businesses and multinational corporations. In fact, the Russian pharma market experienced a 27% growth rate between 2011 to 2013, increasing from 824 billion to 1,045 billion Russian rubles. Furthermore, the market was projected to expand more than threefold by 2020.
However, as a result of the deteriorating economic situation in Russia, the beginning of 2015 saw a reduction of the annual rate of pharma market growth to 7.5%. The unfavourable exchange rate has had a negative effect on the Russian pharma market, as the sector is highly dependent on medicine imports and components manufactured by multinational pharmaceutical companies.
In fact, in value terms, almost 80% of medical drugs sold in Russian pharmacies are imported. The rest are produced domestically, but are mostly made up of substances manufactured abroad. Therefore, the steep ruble devaluation and growing inflation have undercut the purchasing power of Russians.
Additionally, the Russian government regulates the prices for 608 drugs that are classified as “vital and essential.” With the wholesale thresholds not adjusted since 2010, the manufacturing and distribution of some drugs was rendered unprofitable.
Surprisingly, a study conducted by EY in late 2014 demonstrates that, contrary to general perception, pharma executives do not see serious threats to their operations and investment plans in Russia and are not willing to pull out amid the crisis. Indeed, 70% of surveyed pharma companies operating in Russia have not been affected by the current political and economic situation.
Furthermore, 13% of respondents believe that the changes give way to new opportunities. In fact, experts argue that the crisis grants foreign investors a cheap entry ticket into the Russian market. As sixteen major Russian pharmaceutical companies have stopped the production of “the cheapest and the most essential drugs” due to the ruble devaluation, foreign businesses could occupy this segment at a favourable exchange rate.
However, an analysis of the industry suggests that the lack of clarity in the regulatory system and the disadvantageous legal treatment of multinational firms are likely to put investments at risk.
In 2009, the Russian government launched Pharma 2020, an initiative to address systemic problems in Russia’s pharmaceutical industry as well as to expand and modernise the manufacturing of medical drugs within the country, in order to reduce the reliance on import.
The government pledged 177.6 billion rubles to the realisation of the project. The programme successfully stimulated some multinational corporations to penetrate the Russian market through the localisation of their own production in Russia, and through collaboration with domestic pharmaceutical firms.
Japanese Takeda was the first foreign producer to set up a plant in Yaroslavl, investing about 75 million euros into the manufacturing facilities. Later, Bayer, GlaxoSmithKline, TEVA, Berlin-Chemie, AstraZeneca, Novartis, Servier, Sanofi and many others launched production in Russia. In exchange for collaboration with local universities to boost R&D within industrial clusters, multinationals are rewarded with tax optimisation and government purchasing preferences.
Apart from these measures, there are no substantial advantages for foreign investors in Russia’s pharma market. Dmitry Efimov, the Senior Vice President for Russia at Strada AG, suggests that the legislative nuances on local production of medical drugs have not yet been finalised and, hence, companies operating in Russia have not been granted promised preferences.
Nonetheless, having production facilities in the country enables companies to respond quickly to demand spikes. Additionally, there is a view that the localisation of manufacturing in Russia is a mechanism of hedging country risks for multinational pharma corporations, as such investments require only a fraction of their revenues.
The Russian pharma industry is perplexing, particularly for foreign players in a market entry phase.
Firstly, there is an apparent imbalance of regulatory requirements for foreign producers as opposed to domestic. For instance, pharmaceutical product registration under the law “On the Circulation of Medical Drugs” favours Russian firms, according to lawyer Jon Umarov.
Secondly, pharma giants are forced to review their marketing strategies, as the law “On the Fundamental Principles of Public Health” restricts interaction between healthcare workers and pharma representatives.
Finally, the Russian government has taken action to decentralise the healthcare industry by mandating each region to define its own Essential Drugs List. Hence, companies have to target each Russian region separately in order to insert their products into regional EDLs.
Pharma players operating in Russia are confronted with excessive bureaucracy and, as EY points out, foreign manufacturers lack clear understanding of current legislation compared to their Russian counterparts. Additionally, 77% of them struggle to operate on the Russian market due to the corruption.
All in all, the regulatory and law enforcement environment is a significant challenge for foreign pharma companies. The Russian government needs to work on improving legislation regarding foreign pharma businesses, if it is indeed interested in attracting investments.