Ministry Of Economic Development Proposes Drug Price Rises

BMI View : The Ministry of Economic Development's proposal to enable foreign drugmakers to increase prices of medicines on the VED list is positive, however, domestic companies are being offered far more flexibility. The Russian state will continue to offer concessions to domestic companies as it carries out its strategy of self-sufficiency within the pharmaceutical sector.

The Ministry of Economic Development has proposed to the Russian cabinet that foreign drugmakers with products on the Vital and Essential Drugs (VED) list should be allowed to revise their prices in line with levels of inflation in the market. Currently, this is only extended to local, Russian enterprises. However, this rebooking of prices would only be granted unconditionally in 2014 and then on an ad-hoc basis. Foreign companies have been forced to freeze their drug prices since 2010, but according to the Federal Antimonopoly Service (FAS) and the Ministry of Health, most companies price their products in Russia at a premium to other markets, and are therefore opposed to offering foreign drugmakers any leeway.

Similarly, the health ministry says it would oppose allowing significant price rises for foreign medicines, as they constitute a majority of the VED list. The Ministry of Economic Development however, has counter-argued that it would set limits on wholesale and pharmacy margins to prevent any major price escalation. The economic development ministry hopes to influence the Russian market over the long term and prevent withdrawals of essential products from the market as has happened in countries such as Greece and Hungary.

Risks Detracting From Market Potential
Pharmaceutical Sales, 2010-2023

BMI View : The Ministry of Economic Development's proposal to enable foreign drugmakers to increase prices of medicines on the VED list is positive, however, domestic companies are being offered far more flexibility. The Russian state will continue to offer concessions to domestic companies as it carries out its strategy of self-sufficiency within the pharmaceutical sector.

The Ministry of Economic Development has proposed to the Russian cabinet that foreign drugmakers with products on the Vital and Essential Drugs (VED) list should be allowed to revise their prices in line with levels of inflation in the market. Currently, this is only extended to local, Russian enterprises. However, this rebooking of prices would only be granted unconditionally in 2014 and then on an ad-hoc basis. Foreign companies have been forced to freeze their drug prices since 2010, but according to the Federal Antimonopoly Service (FAS) and the Ministry of Health, most companies price their products in Russia at a premium to other markets, and are therefore opposed to offering foreign drugmakers any leeway.

Similarly, the health ministry says it would oppose allowing significant price rises for foreign medicines, as they constitute a majority of the VED list. The Ministry of Economic Development however, has counter-argued that it would set limits on wholesale and pharmacy margins to prevent any major price escalation. The economic development ministry hopes to influence the Russian market over the long term and prevent withdrawals of essential products from the market as has happened in countries such as Greece and Hungary.

Despite this positive development for foreign companies, we believe the primary intent is to benefit domestic companies. Domestic companies will be allowed to re-register prices above the projected rate of inflation if they could prove their manufacturing costs had increased. Russians companies had complained that the method of enabling inflation-linked price rises was late to account for rising costs and that their profits were suffering. Similarly, Russian drugmakers had complained that they were increasing investment in production following the deadline to institute Good Manufacturing Practice (GMP) within their manufacturing sites, and therefore price rises would need to be set at above inflation rates.

The new proposals would enable them to boost revenues to fund their capital investments in upgrading their manufacturing capabilities. The vast majority of small-medium enterprises in Russia's pharmaceutical industry rely on old, Soviet-era factories for their production. Upgrading would incur considerable costs, and potentially set back the state's Pharma 2020 goal of increasing domestic capacity. The Russian government has been particularly willing to offer concessions to Russian firms and has been lax in enforcing regulation on domestic companies; earlier in 2013, it extended its deadline for mandatory GMP standards to 2015 after local companies complained. These proposals are continuation of this theme.

Vital and Essential Drugs List (VED) Important For Drugmakers

On December 14 2011, after considerable delay, then Prime Minister Putin approved the list of vital and essential medicines (VED) for 2012. However, the list has not been updated since. The VED list includes 567 drugs listed by international non-proprietary names (INNs), of which 93 items (16.4%) are produced only by domestic drugmakers, 207 items (36.5%) are produced only by foreign producers and 267 items (47.1%) are produced by both Russian and foreign pharmaceutical companies.

While the expansion of Russia's essential medicines list is generally favourable, the fact that the prices of drugs on the list remained frozen for 2014, and that the government has been so slow to approve the latest list, has disappointed drugmakers and created new challenges for the industry. The VED list is overwhelmingly populated with medicines from foreign drugmakers, and therefore, the prize freeze has amounted to a discounting in real terms to Russian consumers and the state. If however, drugmakers localise production or outsource it to Russian companies, the implications suggest that they would be given the opportunity to change prices.

2014 And Beyond To Fall Short Of Previous Expectations

We previously expected pharmaceutical sales to reach US$50.48bn by 2022, but we now expect sales to fall significantly short of that figure; our forecasts now expect sales to reach US$42.67bn.Our compound annual growth rate (CAGR) expectations in US dollar terms have been revised down considerably in the medium term; whereas previously we expected a five year CAGR of 9.4% in US dollar terms, we now expect that the market will post a five-year CAGR of 6.1% to US$33.75bn in 2018. Our lowered expectations are based on the rouble's depreciation, falling oil prices and reference pricing mechanisms.

The business environment within Russia has worsened as political sentiment echoing from the Kremlin and the Duma is one of greater self-reliance in vital industries. While the pharmaceutical sector as a whole has escaped strongly protectionist policies seen in other industries, we now believe that the course is reversing and that the business environment will pose greater challenges for MNCs over the next 5 years, especially as revenues from oil and gas are set to retreat and the burden of healthcare on the state becomes greater.

Risks Detracting From Market Potential
Pharmaceutical Sales, 2010-2023

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