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Pharmaceutical Industry in Russia - Prospects and trends - EY - Russia

Pharmaceutical Industry in RussiaProspects and trends

How have the recent changes in legislation governing the circulation of medicinal drugs affected your company's financial results?

Which changes in regulation have led to the most difficulties for your company?

Did you succeed in registering maximum supply prices for all products supplied by your company?

How do you assess the situation with regard to the state regulation of prices for pharmaceutical products in Russia?

How do you assess the impact of the compulsory medical insurance law on the Russian pharmaceutical market?

Have you assessed the impact of the compulsory medical insurance law on your company?

Have you considered the need to restructure clinical research arrangements in connection with the enactment as from September 1, 2010 of the new law on the circulation of medicinal drugs?

Indicate the most serious problems faced by your company in light of the proposed changes in the regulation of the industry

The survey results indicate that the majority of Russian manufacturers (83%) plan to expand their existing production facilities.

Foreign and Russian manufacturers who took part in the survey have divided opinions regarding the prospects for changes in the respective shares of market players.

To the question of how the pharmaceutical market will develop in Russia over the next five years, Russian manufacturers answer that the share of Russian companies will naturally increase thanks to state support. Furthermore, state support will, in their opinion, encourage foreign manufacturers to create production enterprises in Russia.

44% of foreign manufacturers envisage setting up production operations in Russia, while they regard other possible developments, such as the acquisition of Russian companies, as less likely.

It may be assumed that a qualitative change in the distribution of forces will begin in
2011, aided by the following factors:

  • The nascent localization of the manufacturing of foreign products
  • The further growth in competition and existing defragmented state of the market
  • The effect of price regulation and compulsory medical insurance laws adopted in 2010
  • The already formulated strategy for the development of the pharmaceutical industry and the federal special-purpose programme.

Forms of business development and trends towards localization of manufacturing

The survey results indicate that the majority of Russian manufacturers (83%) plan to expand their existing production facilities, and two thirds of those surveyed (67%) intend to begin building new production sites.

Which of the forms of business development listed below is your company considering? (Russian companies)

In view of the state import substitution strategy foreign companies are generally considering two main business development scenarios:

  • Setting up their own production operations in Russia – 50% of foreign companies
  • Establishing contract manufacturing with Russian manufacturers – around 44% of respondents.

Which of the forms of business development listed below is your company considering? (foreign companies)

Contract manufacturing may become more attractive in the future thanks to state support for the process of the transition to international manufacturing standards (GMP).

The survey results show that foreign companies have little interest in closer co-operation with Russian manufacturers, e.g. through the transfer of patents and technologies. There are currently only a very few examples of such co-operation on the market.

At present, many major foreign players on the market are already at various stages of production localization: they have announced their investment intentions or have already begun construction.

The survey results show that foreign pharmaceutical companies tend to choose Saint Petersburg, Yaroslavl and Kaluga as the most preferred places to set up production.

Do you plan to set up a production enterprise in one of the pharmaceutical centres …?

The survey results are consistent with actually announced investment projects, in which the Yaroslavl and Kaluga provinces and Saint Petersburg are chosen as locations for production operations.

In particular, according to data from the Committee for Economic Development, Industrial Policy and Trade of Saint Petersburg, nine investment projects were initiated during 2010 for the construction of new factories in the city in addition to the seven already existing medicine manufacturing organizations.

Wholesale distribution market

The wholesale distribution market may be tentatively divided into two segments:

  • The market of medium and small distributors, characterised by a high level of competition as also noted by analysts of DSM Group
  • The market of large national companies, in which the top positions are held by five major enterprises which are represented in all regions of Russia and have a far-reaching distribution system.

There is a fairly high degree of concentration in the second market segment, owing partly to the fact that top companies have increased the proportion of indirect sales, and particularly sales to smaller wholesalers.

Strict regulation and monitoring of compliance with maximum wholesale markets have made things even tougher for small and medium-sized distributors.

How do you assess the business prospects of medium / small distributors?

Russian distributors have divided opinions regarding the business prospects of medium/small distributors. 80% of manufacturers believe that small and mediumsized distributors will be taken over by large players, while 20% take the view that small wholesalers will simply be squeezed out of the market.

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  • Dmitry Khalilov
    Partner, Head of the Pharmaceutical Group in the CIS
    Office: Moscow
    Tel: +7 (495) 755 9757
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