Contract Manufacturing Set To Receive Boost

BMI View : With import restrictions on the horizon, we believe the pharmaceutical market dynamics are set to become attractive for contract manufacturer organisations (CMO) in Russia. The country remains one of the biggest growth opportunities for pharmaceutical companies in emerging markets and we expect Western CMO interest to rise over the next two to three years.

Contract manufacturing is set to pick up in Russia as restrictions on imports increase and contract manufacturing organisations find a niche for delivering medicines on behalf of foreign players to the local market. The Russian government's plans to increase self-sufficiency in pharmaceuticals are cultivating the market dynamics in which CMOs can thrive.

We note that several push factors are causing multinationals to localise production, enter joint-ventures or outright acquire Russian companies, notably:

  • A requirement for local clinical trials before drugs can be approved; this is expensive to perform

  • Preferential treatment for locally-produced medicines in government tenders

  • Tax incentives for establish manufacturing capacity in industrial clusters

  • A degree of pricing flexibility; pricing restrictions will be waived on locally manufactured medicines in government tenders

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

Contract Manufacturing Set To Receive Boost

BMI View : With import restrictions on the horizon, we believe the pharmaceutical market dynamics are set to become attractive for contract manufacturer organisations (CMO) in Russia. The country remains one of the biggest growth opportunities for pharmaceutical companies in emerging markets and we expect Western CMO interest to rise over the next two to three years.

Contract manufacturing is set to pick up in Russia as restrictions on imports increase and contract manufacturing organisations find a niche for delivering medicines on behalf of foreign players to the local market. The Russian government's plans to increase self-sufficiency in pharmaceuticals are cultivating the market dynamics in which CMOs can thrive.

We note that several push factors are causing multinationals to localise production, enter joint-ventures or outright acquire Russian companies, notably:

  • A requirement for local clinical trials before drugs can be approved; this is expensive to perform

  • Preferential treatment for locally-produced medicines in government tenders

  • Tax incentives for establish manufacturing capacity in industrial clusters

  • A degree of pricing flexibility; pricing restrictions will be waived on locally manufactured medicines in government tenders

Joint ventures are cheap and easy to set up but limit earnings as profits are shared between partners. Investing in local manufacturing is very risky as it requires a significant upfront investment and takes several years to complete. The regulatory environment in Russia is evolving and changing, and therefore CMOs offer companies a middle ground for selling domestically manufactured medicines in Russia without committing capital into fixed assets. The presence of CMOs will also be a boon for Russian biotech companies and start-ups, enabling them to focus their capital on R&D while outsourcing their manufacturing requirements.

Until present, Western-based CMOs have shied away from utilising Russia owing to the country's inability to compete on a cost-basis with neighbouring China and India. However, in light of the pharmaceutical market's growth prospects and the restrictions being placed, this could potentially change over the next two to three years. Several Russian companies have acted as CMOs for foreign drugmakers, namely Pharmstandard in its production of Johnson & Johnson's Velcade (bortezomib) and Merck's deal with Akrikhin. However, with the upcoming rollout of national drugs insurance, we see dedicated CMOs accelerating their plans within Russia.

Considerable Growth Opportunities But Market Barriers Set To Rise

The Russian government is undertaking measures to reduce the country's reliance on imported goods as part of its "Pharma 2020" strategy. While the government is not the largest purchaser of medicines (30% of total value in 2013), the rollout of a national drug reimbursement programme in 2015/16 should see the proportion of government's expenditure relative to private consumption of pharmaceuticals rise considerably over the next decade.

The choice of medicines and indications under the government programme is currently limited, but over the next ten years, a national medicine reimbursement programme will be implemented that promises to unlock a market for innovative and expensive drugs. The import restrictions being discussed will carry over into this programme, a sub-sector that is expected to enlarge significantly over the next decade. A spike in MNC joint ventures and fixed asset investment over the past three years are a reflection of how MNCs are strategically planning for the long term in Russia. CMOs will undoubtedly have a part to play in the market's development and enabling foreign firms to circumvent these restrictions.

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