BMI View: Comprehensive and clear legislation on the production, selling and registering of medicines is vital to promoting a vibrant pharmaceutical sector. The disparate nature of laws in place regarding the pharmaceutical sector have held back investment and posed significant risks for the industry. We view the need to harmonise legislation as a key step towards reducing the regulatory burden on the sector and enabling dynamism in Russia's pharmaceutical sector. We continue to hold a positive view on the long term outlook of the Russian pharmaceutical market given favourable demographics and rising per capita spending.
The head of the Association of Russian Pharmaceutical Manufacturers (ARPM) has urged the government to reinstate Order of Economic Development legislation, which codified preferential treatment for domestic producers in state drug procurement. The order is due to expire on December 31 2012, having come into effect in March.
The order is the only legislation to grant domestic pharmaceutical companies an advantage in the procurement process, and if it is not renewed before the end of the year, Russian drugmakers and foreign firms with local production will lose their advantage over importers.
We hold a negative view of the order, as we believe it stifles innovation and competition, despite its intended effect of boosting investment in Russia. We also believe it reduces patient access to the latest medicines, as companies without the cash reserves to localise production are unfairly disadvantaged compared with larger multinational firms that have access to funds from capital markets.
Pricing Grievances Aired
Drugmakers in Russia have positively viewed the Ministry of Health's decision to allow them to re-register drug prices for their products. However, they are concerned by the Ministry's refusal to allow them to link drug prices to inflation indices. Currently, the legislation forces drugmakers to re-register drug prices in line with inflation once a year, as opposed to prices automatically rising. The re-registration process is lengthy, and in the intervening period before approval, companies essentially lose money in real terms as they are forced to continue selling at below-inflation prices.
We believe it is important for drugmakers to be able to set prices in line with inflation and according to fair market value. Government measures to control prices stifle investment in an industry that has created a significant number of jobs in Russia and has diversified the country's output away from petroleum and natural gas production.
Improvements To Come Next Year?
Russian legislation on the procurement, sale and registration of medicinal products has been characterised by its patchwork nature, a lack of uniformity, and conflicting or duplicative directives. The Ministry of Health has prioritised legislative reform for 2013 as the industry has directly lobbied Prime Minister Dmitry Medvedev and President Vladimir Putin. Earlier this month, the Department of Chemical Engineering and Bioengineering of the Ministry of Trade posted a draft federal law harmonising legislation around medicinal products and invited independent critique of its draft. The draft, while a step in the right direction, fails to link previous pieces of legislation on medicinal products and medical devices.
Indeed, the frequency and inconsistency of legislation on medicinal products has been a problem for drugmakers in Russia. Companies have delayed drug launches, investment decisions and hiring in expectation of legislative changes and producing a single, comprehensive document would provide the sector with security and enable them to better make strategic decisions within Russia.
BMI projects the value of the Russian pharmaceutical market to reach RUB664.5bn (US$20.95bn) in 2012, with year-on-year (y-o-y) growth of 9.4% in local currency terms, though just 1.4% in US dollar terms. Between 2011 and 2016, we forecast a compound annual growth rate of 9.9% in local currency terms, equivalent to 8.6% in US dollar terms. The growth in the Russian pharmaceutical market has mainly been driven by private expenditure on over-the-counter (OTC) and patented, prescription drugs. Rising incomes have led to an increase in out-of-pocket payments, with per-capita spending increasing by a compound annual growth rate (CAGR) of 13.7% since 2007. The expansion of state health insurance coverage to millions more Russians and an increasing trend of self-medication has driven rapid growth in retail pharmacy sales.
|Market Growth Expected to Continue|
|Russian Pharmaceutical Sales, US$bn|