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Global pharma eyes Russia riches with local presence

Global drugmakers are set to pour over a billion dollars into Russian manufacturing in a bid to win the status of local producers and sidestep a tougher government stance on imported medicines.

Pacy emerging market growth is key to corporate top lines as Western market sales slow and many leading drugs lose patent protection, and the prospect of preferential treatment from a protectionist Russian state is set to drive investment there.

Russia, with a 140-million population, is expected to see mid-double-digit percentage growth in its pharmaceutical market in 2010, according to industry analysts, against a projection of 4-6 percent rate for the global industry.

Acquiring 'local player' status, through building or buying facilities in the country, is a way for global firms to tap into the country's strong growth prospects, even as the government looks to cut down on imports, industry sources said.

"Global pharmaceutical market players are investing increasingly in various types of localisation," Vladimir Shipkov, executive director of the Association of International Pharmaceutical Manufacturers in Russia (AIPM), said.

"Just 3-5 years ago, there was no question of such a surge in investments," Shipkov said, adding that AIPM estimated that global drugmakers would spend at least a combined $1 billion on setting up local production in Russia in the near future.

Several global companies have recently announced plans to start producing in Russia, including Nycomed[NYCMD.UL] and Novo Nordisk<NOVOb.CO>, while AstraZeneca<AZN.L> and Novartis said they are considering such a move.


Russia aims to increase local producers' share of total drug sales in Russia to 25 percent by 2012 and 50 percent by 2020, from 20 percent now, and has introduced a range of measures to meet the target.

The government already favours locally produced drugs in a programme to help low-income Russians, and analysts believe the practice would likely be expanded if a proposed universal prescription drug insurance system gets off the ground.

The state also provides a speedier drug registration process for local producers, saving them money and time when launching new drugs to the market.

"Certainly companies have to be loyal to the government, try to build at least packaging facilities to show that they have a long-term commitment to the market," David Melik-Guseinov, head of market research at Pharmexpert, said.

"What is even more important for the government is the possibility to ... require that local producers do not raise prices in crisis situations."


The government has already introduced price controls to rein in inflation and avoid social unrest in tough economic times, though they only apply to one third of all drugs sold in Russia.

Under a new bill, which will become law in September, drugmakers had to register by April 1 maximum prices for medicines that fall under a so-called 'essential drugs' list, and cannot raise them before the list is reviewed next year.

Swiss drugmaker Nycomed has said it was cautious about its Russian business margins because of this provision, but said the new rules were not "extremely worrying" and forecast faster growth after 2011 when it adapts to new rules.

For those international companies which produce 'essential' drugs, local manufacturing can also reduce currency risks, said Julia Fedorova, Senior Associate at law firm CMS.

"When registering maximum prices in roubles, foreign firms are guided by foreign currency rates. If the rouble rate changes significantly against those currencies, a company may just stop supplying its products to the Russian market," Fedorova said.

"This forex risk can be reduced substantially if it produces medicines in Russia, and the more stages of production it has, the less the forex risk is," Fedorova said.


While Russia's expanding protectionist stance is seen in sectors from oil to mining and autos to telecoms, causing concern to some, global pharma will find it hard to resist investing in the fast-growing and underserved market.

"The market is growing by around 15 percent... and will keep growing at this pace for at least 10 years -- consequently there is a much faster return on investment in the Russian market than in the U.S. and Europe," Melik-Guseinov said.

Pharmexpert forecasts the Russian pharmaceutical market to exceed $60 billion by 2020, assuming it keeps growing by 15 percent, while the possible introduction of the medical insurance system could take this figure to $80-90 billion.

"The emergence of a new segment will give a significant boost to market development. Additional market growth at a pace of 18-20 percent in terms of money is possible here, with an 8-10 percent growth in packaging," marketing agency DSM said.

DSM forecasts the average per capita consumption of medicines to quadruple in Russia within the next 10 years.


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