2014 Forecast Downgraded On Disappointing Imports And Retail Data

BMI View : We do not expect to see pickup in pharmaceutical import demand and accelerated growth in pharmacy sales over the course of 2014. Coupled with weakening consumer sentiment and reserved government expenditure on pharmaceuticals, our 2014 forecasts have been downgraded. We now see Russia's import reliance declining much faster than anticipated as more multinationals localise production to head-off upcoming restrictions.

We have recently downgraded our full year pharmaceutical forecast for Russia in the wake of disappointing import figures and less than expected growth in commercial pharmaceutical sales in the first quarter of 2014.

Imports posted a decline of 18.3% in US dollar terms in Q114, precipitated by the Ukraine crisis and the sell-off in the Russian rouble, as Russian wholesalers and importers held off re-ordering and burned through inventory stocks. In April 2014, imports declined by 2.05% indicating a tapering in the decline and a boost in demand from inventory re-stocking, but weakening consumer sentiment will weigh on demand for pharmaceuticals over the course of 2014. Support for the pharmaceutical market from government purchasing is unlikely to move the needle in terms of imports and pharmaceutical demand in 2014.

Tapering In Import Decline In April
Pharmaceutical Imports, USDbn

2014 Forecast Downgraded On Disappointing Imports And Retail Data

BMI View : We do not expect to see pickup in pharmaceutical import demand and accelerated growth in pharmacy sales over the course of 2014. Coupled with weakening consumer sentiment and reserved government expenditure on pharmaceuticals, our 2014 forecasts have been downgraded. We now see Russia's import reliance declining much faster than anticipated as more multinationals localise production to head-off upcoming restrictions.

We have recently downgraded our full year pharmaceutical forecast for Russia in the wake of disappointing import figures and less than expected growth in commercial pharmaceutical sales in the first quarter of 2014.

Imports posted a decline of 18.3% in US dollar terms in Q114, precipitated by the Ukraine crisis and the sell-off in the Russian rouble, as Russian wholesalers and importers held off re-ordering and burned through inventory stocks. In April 2014, imports declined by 2.05% indicating a tapering in the decline and a boost in demand from inventory re-stocking, but weakening consumer sentiment will weigh on demand for pharmaceuticals over the course of 2014. Support for the pharmaceutical market from government purchasing is unlikely to move the needle in terms of imports and pharmaceutical demand in 2014.

Tapering In Import Decline In April
Pharmaceutical Imports, USDbn

We now see pharmaceutical imports in 2014 declining by 7.3% in US dollar terms to USD13.14bn (previous forecast: +1.2%, 14.35bn). Given that imports constitute almost 60% of the total market value, we have revised our full year forecast downwards in both local currency and US dollar terms; we now see local currency growth of 8% and a decline in US dollar terms of -1.3% to RUB857bn (USD24.36bn).

Lending further credence to our downgrade is evidence from IMS Health data for commercial pharmaceutical sales in Russia; in Q114, pharmacy sales rose by 8.5% to RUB214bn (USD6.22bn), well below our expectations. In US dollar terms this represented a decline over the previous year, owing to the depreciation of the rouble over Q114. We expect that wholesalers and traders within the pharmaceutical supply chain to pass price hikes onto Russian consumers in Q214 or H214 if rouble sentiment does not improve in the intervening period, posing upside risk to our forecasts, but we do not believe there will be significant rebound in sales over the remainder of the year.

Import Statistics
January February March April
2012 (USDbn) 0.66 1.19 1.11 1.01
2013 (USDbn) 0.86 1.19 1.23 1.22
2014 (USDbn) 0.71 0.97 1.00 1.20
y-o-y change % -17.54 -18.32 -18.70 -2.05
Source: BMI, Federal Customs Service

Import Reliance Set To Narrow Over Next Ten Years

The business environment for foreign drugmakers is expected to become even more challenging over the next five years due to potential protectionist measures, as relations worsen between Russia and Western countries. Russia is increasingly looking to restructure its economy to become more self-reliant in a host of specific sectors. In response, multinational companies have localised production or formed joint ventures with local companies in order to circumvent legislation designed to narrow Russia's import reliance. With a wave of factories and manufacturing sites set to come online in 2015, we see import growth trailing overall market growth by 2018.

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