Despite Import Barriers, Multinationals Commit To Russian Market

BMI View : In the face of tension with its Western neighbours, the Russian state will act to reduce its external reliance within strategic sectors at a more rapid tempo. While local companies do not possess the scale and know-how to compete with multinationals, state support is providing a boost to local competitiveness. Joint ventures and partnership deals between multinationals and local companies will accelerate to head off further regressive measures.

The breakdown in relations between the West and Russia has lead to the imposing of limited sanctions on Russia, but despite the negative sentiment and potential for retaliatory measures from the Russians, the pharmaceutical industry is entrenching itself further into the Russian market. Local subsidiaries of multinational companies have expressed their commitment to operating in Russia despite the elevated geopolitical tension. However, Vladimir Putin is pushing for import stemming measures in all sectors. Over the next five years, we believe that import dominance in pharmaceuticals will be eroded, although we believe that imports will continue to dominate the market in value terms.

Pharmaceutical Companies Remain Committed To Russia

BMI View : In the face of tension with its Western neighbours, the Russian state will act to reduce its external reliance within strategic sectors at a more rapid tempo. While local companies do not possess the scale and know-how to compete with multinationals, state support is providing a boost to local competitiveness. Joint ventures and partnership deals between multinationals and local companies will accelerate to head off further regressive measures.

The breakdown in relations between the West and Russia has lead to the imposing of limited sanctions on Russia, but despite the negative sentiment and potential for retaliatory measures from the Russians, the pharmaceutical industry is entrenching itself further into the Russian market. Local subsidiaries of multinational companies have expressed their commitment to operating in Russia despite the elevated geopolitical tension. However, Vladimir Putin is pushing for import stemming measures in all sectors. Over the next five years, we believe that import dominance in pharmaceuticals will be eroded, although we believe that imports will continue to dominate the market in value terms.

Pharmaceutical Companies Remain Committed To Russia

At the St. Petersburg Economic Forum held in May 2014, Johnson & Johnson corporate management led negotiations with the Ministry of Industry and Trade on increasing investment in Russia, highlighting the importance of the country to the firm. According to AIPM executive director Vladimir Shipkov, over the last 4 years, multinational companies have invested almost USD1.6bn in localisation and partnerships in Russia. But these investments are also in response to regressive measures in the sphere of public procurement and the threat of being locked out of the market once a system of national reimbursement for medicines is introduced.

Ministry Of Industry Continues Import Substitution Push

One of Putin's core goals is to reduce external reliance for technology, pharmaceuticals and other strategic sectors. Within pharmaceuticals, the Pharma2020 strategy has been created to eventually transition Russia to 50% self-sufficiency in pharmaceutical production by 2020. While we see this goal as highly unlikely in the timeframe involved, we note that measures are being implemented that are catalysing moves by multinational drugmakers to comply as the barriers to entry for imported products are ramped up.

These measures will see an increase in the value and volume of localised production, and an increase in market share towards domestically-produced medicines, but Russia's import reliance for innovative pharmaceuticals and generic pharmaceuticals will continue, especially as 70% of the value of the Russian market is in the retail sector where barriers are minimal. Restrictions on imports will only apply to public procurement, which makes up the remaining 30% of the value of the market.

This portion of the Russian market is also volatile and subject to state intervention. The Ministry Of Industry is producing a list of goods to be purchased 'for state needs' by October 1 that prioritises goods and services exclusively from Russian or Customs Union (CU) manufacturers. While Russian and CU manufacturers cannot produce patented or many innovative drugs, the rise of innovative companies such as Biocad and PetroVax indicate that domestic competition is evolving to meet the needs of the Russian state, especially when the state is providing generous support in the form of loans and tax incentives as well as competitive advantages such as preferential treatment in tenders.

Complying with the Pharma 2020 rules has proven to be difficult for multinational drugmakers but also for Russian companies. Officially, some 26% of Russian pharmaceutical demand is derived from locally produced drugs, in volume terms, but this figure is inflated, as 'local production' in many cases involves simply packaging pharmaceutical goods within Russia. The government has decided to close this 'loophole' by changing the classification of what constitutes locally produced to include products undergoing the full manufacturing cycle and this will enter into effect in 2016. Multinationals have anticipated these moves and broken ground on manufacturing sites in the country. Partnerships and joint ventures between local companies and multinationals are likely to become more important in the future in order to comply with the evolving regulatory environment of Russia. The geopolitical aspect will act as a spur to this trend as drugmakers attempt to stay ahead of further regressive import measures.

Investment In Russian Manufacturing
Company Country of Origin Investment Type Value (US$ mn) Date
Berlin-Chemie Italy Production facility 40 Mar-10
Novo Nordisk Denmark Production facility 100 Apr-10
Sanofi France Production facility n/a Sep-10
Krka Slovenia Production facility 185 Jan-11
Lupin India Production facility 50 Feb-11
Galenika Serbia Production facility 37.9 Feb-11
Johnson & Johnson USA Acquisition of OTC business from JBCPL 260 May-11
Novartis Switzerland Production facility 500 Jun-11
Solagran Australia Production facility 50 Jun-11
AstraZeneca United Kingdom Production/R&D facilities 1200 Jun-11
Johnson & Johnson USA Investment in Skolkovo Foundation 30 Jun-11
EBRD United Kingdom Partial Acquisition (15%) of Katren n/a Jan-12
Valeant Pharmaceuticals Canada Acquisition of NaturProdukt 180 Mar-12
Merck & Co USA Joint-Venture with Akhrikhin - Apr-12
Vertex Pharmaceuticals USA Production facility 60 Jun-12
Takeda Japan Production facility 96.46 Sep-12
Abbott USA Acquisition of PetroVax 196-294 Oct-12
Teva Israel Production facility 100 Nov-12
Baxter USA Production Facility 25 May-14
Polpharma Poland Acquisition n/a
Source: BMI

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Geography: Russia
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