Bullish On Russian Pharmaceutical Market Despite Risks

BMI View : Demographic trends, rising incomes and greater state spending on healthcare will drive growth within the Russian pharmaceutical sector. However, we also see risks to investment and considerable barriers for foreign companies. On balance, we remain bullish on the growth prospects for Russian pharmaceutical spending, but highlight local companies as having better opportunities to realise this growth than multinationals.

Russia offers the largest commercial market within the Central and Eastern European (CEE) region for the pharmaceuticals and healthcare sector. We see the country as being the primary growth driver for the region, with both public and private spending contributing to expanding commercial opportunities. Russia's demographic and economic outlook also bodes well for the sector's development. Nonetheless, we stress that there are key risks to this bullish view.

Key Growth Drivers For Pharmaceutical Spending

  • Large, ageing population and expanding life expectancy; Russia's pharmaceuticals and healthcare spending reflects its large population and the demographic build-up of the country. Russia has a considerable pensionable population, who rely on social expenditure from the state and their own pensions to purchase medicines and visit doctors. Given that almost 80% of lifetime healthcare consumption occurs past the age of retirement and the fact that this particular demographic is expected to grow considerably (from 13% of the total population to 18% by 2030), we see sustained demand for pharmaceuticals and healthcare services over the long term.

  • Considerable disease burden; a combination of factors namely, an ageing population, sedentary lifestyles, Western dietary habits, prevalent tobacco use and alcohol consumption have contributed to high incidence rates of cancers, diabetes, cardiovascular diseases and other non-communicable diseases. These types of diseases require frequent (often lifelong) consumption of pharmaceuticals and drawn-out demand for healthcare services. This trend will also ensure sustained growth in pharmaceutical and healthcare spending.

  • Rollout of national medicines reimbursement programmes; although care at state hospitals is free to most Russians, pharmaceuticals are currently paid through out-of-pocket spending. The Russian state, recognising that purchasing life-saving pharmaceuticals is out of reach for many consumers, has mandated the rollout of federally-funded reimbursement for patients. A national programme is set to enter into effect by 2015/16, and therefore the state's involvement in the market is expected to increase significantly. This presents a large opportunity for innovative drugmakers to market their high value products to a volume purchaser.

  • Rising consumer incomes; the size of Russia's middle class is expanding rapidly. The proportion of households earning above $10,000 will rise to 50% by 2015. This will feed into consumer pharmaceutical sales growth, in both the over-the-counter and prescription drug subsectors.

Population Of Pensioners Set To Rise
Total Pensionable Population (%)

Bullish On Russian Pharmaceutical Market Despite Risks

BMI View : Demographic trends, rising incomes and greater state spending on healthcare will drive growth within the Russian pharmaceutical sector. However, we also see risks to investment and considerable barriers for foreign companies. On balance, we remain bullish on the growth prospects for Russian pharmaceutical spending, but highlight local companies as having better opportunities to realise this growth than multinationals.

Russia offers the largest commercial market within the Central and Eastern European (CEE) region for the pharmaceuticals and healthcare sector. We see the country as being the primary growth driver for the region, with both public and private spending contributing to expanding commercial opportunities. Russia's demographic and economic outlook also bodes well for the sector's development. Nonetheless, we stress that there are key risks to this bullish view.

Key Growth Drivers For Pharmaceutical Spending

  • Large, ageing population and expanding life expectancy; Russia's pharmaceuticals and healthcare spending reflects its large population and the demographic build-up of the country. Russia has a considerable pensionable population, who rely on social expenditure from the state and their own pensions to purchase medicines and visit doctors. Given that almost 80% of lifetime healthcare consumption occurs past the age of retirement and the fact that this particular demographic is expected to grow considerably (from 13% of the total population to 18% by 2030), we see sustained demand for pharmaceuticals and healthcare services over the long term.

Population Of Pensioners Set To Rise
Total Pensionable Population (%)
  • Considerable disease burden; a combination of factors namely, an ageing population, sedentary lifestyles, Western dietary habits, prevalent tobacco use and alcohol consumption have contributed to high incidence rates of cancers, diabetes, cardiovascular diseases and other non-communicable diseases. These types of diseases require frequent (often lifelong) consumption of pharmaceuticals and drawn-out demand for healthcare services. This trend will also ensure sustained growth in pharmaceutical and healthcare spending.

  • Rollout of national medicines reimbursement programmes; although care at state hospitals is free to most Russians, pharmaceuticals are currently paid through out-of-pocket spending. The Russian state, recognising that purchasing life-saving pharmaceuticals is out of reach for many consumers, has mandated the rollout of federally-funded reimbursement for patients. A national programme is set to enter into effect by 2015/16, and therefore the state's involvement in the market is expected to increase significantly. This presents a large opportunity for innovative drugmakers to market their high value products to a volume purchaser.

  • Rising consumer incomes; the size of Russia's middle class is expanding rapidly. The proportion of households earning above $10,000 will rise to 50% by 2015. This will feed into consumer pharmaceutical sales growth, in both the over-the-counter and prescription drug subsectors.

However, there are pertinent risks to be aware of, namely:

  • Preference for locally produced medicines over imports; Russia's reliance on imports is being challenged by the Russian state. The government is imposing restrictions to increase the ability of the local industry to meet the market's needs. Foreign companies will need to invest heavily in local production before being able to compete in state procurements.

  • Pricing restrictions; Russia is following in the vein of European countries and imposing geographic reference pricing, placing a ceiling on profit margins for specific prescription medicines.

  • Mixed IP enforcement; several concepts within intellectual property laws are still vaguely defined within Russia (namely biosimilars and biologics), which has enabled the development of competitor products to protected medicines.

  • Corruption; state procurement and operations within Russia are subject to the risk of favouritism, back-door deals and kick-backs.

  • Economic reliance on hydrocarbons; a decline in oil prices or disruption to production will have considerable impact on the state's finances and the private sector outlook. This could moderate the level of healthcare spending undertaken by both citizens and state.

  • Geopolitical tension between Russia and the West; while Russia has welcomed foreign companies, the mood is turning ambivalent, especially in the wake of US sanctions that left many Russians without banking services. The state sees self-sufficiency as a strategic objective, and this will potentially be actively encouraged, to the detriment of foreign companies.

On balance, given the growth opportunities and risks within the Russian market, we see Russian drugmakers as having better exposure to the market's overall growth, relative to multinational companies (MNCs). We view market access barriers and state ambivalence as significant hurdles to the success of MNCs in Russia. While brand awareness presents advantages to MNCs, the greater role of the state in the purchasing of pharmaceuticals over the coming years will favour domestic companies, as the Russian government has explicitly stated it intends to offer preferential treatment to Russian firms.

We see the Russian pharmaceutical market growing at a US dollar, compound annual growth rate of 5.6% over the period 2013-2023, from USD24.7bn, to a final value of USD42.5bn. On a per-capita basis, this would amount to USD307 per person by 2023, almost 60% of the average per capita spending by EU-9 countries (USD700). On that aspect, Russia's pharmaceutical and healthcare outlook is set to align more closely with its European peers, although we expect that the gap between Western Europe and Russia will persist for a very long time.

Pharmaceutical Spending To Continue Long Term Growth
Pharmaceutical Sales, 2010-2023
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